Bank of Greece : Speech by Dimitris Malliaropulos, Chief Economist and Director of economic analysis and research, during the ‘Greece Trek 2023’ initiative of The Fletcher School of Law and Diplomacy at Tufts University

Economic outlook

Global economy

High inflation, monetary policy tightening and pandemic-related disruptions in China dampened global growth in 2022. These factors continue to constrain growth in the first months of 2023, except for disruptions in China, which were short-lived and recovery is already under way. Overall, manufacturing output remained weak by historical standards, but there are tentative signs of stabilisation especially in Europe, supported by declining energy prices. Also, the services sector activity across advanced economies seems to benefit from still resilient labour markets.

Looking further ahead, the reopening in China is expected to provide support to the global economy. However, global growth will remain relatively subdued. The ECB projects world real GDP growth to decline from 3.3% in 2022 to 3.0% this year, before very gradually increasing to 3.3% in 2025. Global growth forecasts have been revised upwards compared to previous projection rounds in late 2022, on the back of an improved outlook for China and stronger growth in the US. However, rising stress in financial markets following the collapse of Silicon Valley Bank in the US increase the uncertainty about the global economic outlook, as it can potentially lead to a tightening of banks' credit standards.

Although there are increasing signs that global headline inflation has passed its peak, price pressures in the global economy remain high. While lower energy prices and a weaker dollar support a deceleration of inflation, resilient labour markets and strong wage growth point to still strong underlying inflation pressures. In addition, food price inflation remains stubbornly high. This suggests that the process of disinflation will be gradual.

Euro area

Euro area economic activity slowed significantly at the turn of the year, with growth stalling. However, with the energy supplies now more secure and energy prices having eased significantly over the past few months, confidence has improved and the short-term outlook has brightened somewhat. Lower energy prices, dissipating global supply chain bottlenecks and robust labour markets are expected to support aggregate demand. Meanwhile higher interest rates, tighter financing conditions and the unwinding of fiscal support measures during the energy crisis are expected to weigh on growth. Overall, annual average real GDP growth is expected to slow down to 1.0% in 2023 (from 3.6% in 2022), before rebounding to 1.6% in 2024 and 2025.

Headline inflation is expected to fall below 3.0% only at the end of 2023, stabilise in 2024 and moderate further to reach the inflation target of 2.0% in the third quarter of 2025. The expected decline of headline inflation in the medium-term also reflects the gradual impact of monetary policy normalisation.

Greece

The growth rate of the Greek economy in 2022 is estimated at 6.1%. The drivers of this good performance are private consumption, investment and exports. Government support measures, improving consumer and investor confidence as well as reviving tourism and other exports supported economic activity.

In 2023, the growth rate is projected to slow to somewhere between 2% and 2.5%, due to a slowdown in economic activity in the euro area, affecting export growth, and a significant deceleration of private consumption growth. In addition, both fiscal and monetary policies are expected to have a contractionary impact on economic activity in 2023.

In 2024 and 2025, the growth rate is expected to recover, reaching 3.1% and 2.8%, respectively.

The main drivers of growth over the projection period 2023-2025 are expected to be investment and exports and, to a lesser extent, private consumption.

Investment will be supported by the utilisation of available European Union resources. Greece is expected to receive funding of around €40 billion from the EU long-term budget 2021-2027 and €30 billion from the Recovery and Resilience Facility (RRF) until 2026. These resources are expected to attract additional private funds.

Exports will grow in 2023 at a much softer pace compared to 2022, due to weaker economic activity in the euro area and the global economy.

HICP inflation is expected to gradually decelerate to 4.4% in 2023, 3.4% in 2024 and 2.4% in 2025, mainly due to lower energy prices and negative base effects. Core inflation will remain high in 2023. It will decline only gradually over the rest of the projection horizon, due to lower indirect effects from easing energy prices.

Risks to the outlook

The improvement in the outlook is still fragile. The balance of risks to growth remains tilted to the downside and to inflation to the upside. Risks include: (i) an escalation of the war in Ukraine and additional sanctions; (ii) supply-side risks in global commodity markets; (iii) more adverse developments in the residential real estate sector in China; (iv) financial vulnerabilities from high debt and stretched asset valuations, and also in specific financial market segments; and (v) fragmentation of the global trading system.