According to the European Commission, Greece has been severely affected by the COVID-19 pandemic as the large services sector and the dependency on international tourism make it particularly vulnerable to shocks triggered by travel restrictions and social distancing measures. The European Commission forecasts a 9% decline in GDP for Greece in 2020.
Brussels, Belgium: 6 November 2020
According to the European Economic Forecast,
In the second quarter of 2020, real GDP declined by an unprecedented 14% quarter-on-quarter after a relatively mild decline of -0.7% quarter-on-quarter in the first quarter. The downturn was a result of the measures taken to limit the spread of the virus, which were most stringent between mid-March and mid-May. Both domestic demand and exports were severely affected. The swift policy response to safeguard employment and ensure liquidity for businesses prevented a more negative impact on the labour market in the first half of the year. Unemployment peaked at 18% in June, up from 15.6% in February, but declined to 16.8% in July.
Economic activity is expected to have recovered to some extent following the gradual lifting of restrictions in mid-May. However, with some restrictions still in place that are affecting consumer behaviour and disposable incomes and potential reintroductions of measures on account of rising numbers of infections, private consumption is expected to recover only gradually over the forecast period. High uncertainty, lower revenues and liquidity constraints took a toll on investment in the first half of 2020, but public investment and liquidity support are expected to facilitate the recovery. Overall, real GDP is forecast to decline by 9% in 2020 followed by a partial rebound in at 5% growth in 2021 and 3½% in 2022.
Source: European Economic Forecast
The external sector also registered a record decline in the second quarter of 2020, with exports of declining by 32% year-on-year. Net exports are expected to contribute negatively to GDP growth in 2020, but turn positive during the recovery in 2021 and2022. While goods exports are expected to recover quickly, exports of services are expected to remain well below pre-crisis levels even beyond the forecast horizon. International tourism, which is particularly important for Greece’s economy, was the driver of the large drop in services exports in the first half of 2020. Tourist arrivals are expected to only partially recover in 2021 and 2022.
Uncertainty remains very large, particularly in relation to the tourism sector and travel restrictions, and the remaining size of companies’ safety buffers. Additional risks are related to geopolitical tensions in the region and migration pressures. To the upside, Greece is likely to receive a substantial amount of funding under the Recovery and Resilience Facility, which could significantly support domestic demand once implemented.
Greece’s headline balance is expected to decline to close to -7% of GDP in 2020 due to the economic downturn and the cost of fiscal measures taken to address the crisis, which is estimated at 4.1% of GDP. The forecast also incorporates the payment of retroactive pensions worth 0.8% of GDP following a Council of State ruling in July 2020. The primary balance monitored under enhanced surveillance is projected to reach a deficit of 4½% of GDP in 2020.
Source: European Economic Forecast
The general government balance is expected to remain in deficit in 2021 and 2022. The forecast factors in the temporary measures announced by the government for 2021, most importantly the decrease in social security contribution rates, the abolition of the social solidarity tax for private-sector earners and a new temporary recruitment subsidy programme with an estimated fiscal cost of 1.1% of GDP. The forecast also includes the cost of astepped-up 7-year defence programme. The expected gradual economic recovery and the expiry of the emergency measures are projected to slightly reduce the general government deficit to around 6¼% of GDP in 2021. Under a no-policy-change assumption, the general government deficit is expected to decrease further to 3½% of GDP in 2022. This forecast does not include any funding underthe Recovery and Resilience Facility.
The fiscal forecast is surrounded by substantial risks. These risks relate the activation of state guarantees that have recently been recently issued as part of the emergency measures. Further risks relate to the cost of ongoing litigation cases and remaining public service obligation, which could deteriorate the balance when agreed. The uncertainty related to the full extent of the retroactive compensation for cuts in supplementary pensions and seasonal bonuses introduced by previous pension reforms remains, as the 2020 Council of State ruling has not be published yet. Further risk stems from the potential additional cost of the coverage of the people without health insurance. On the positive side, Greece is expected to greatly benefit from funding under the Recovery and Resilience Facility, which could trigger additional revenues through its expected impact on growth. Public debt is expected to increase to around 207% of GDP in 2020 before declining to around 195% in 2022, supported by the economic recovery.
Tourism is among the industries that have been most affected by the restrictions imposed to contain the COVID-19 pandemic. Greece is among the countries the economy of which is highly dependent on the tourism sector. Greece has one of the highest percentages of the workforce involved in tourism (11%). In terms of the tourism sector’s share in total gross value added, Greece is among the leading countries with about 10%.
According to the European Commission, despite the return to normality over the summer, when restrictions to contact-intensive sectors, travel services, and border crossings were eased, the data available suggest that the tourism sector saw only a limited rebound. With the resurgence of COVID-19 infections in recent weeks, new constraints on daily life are being put in place that will again strongly hinder tourism-related activities. Furthermore, under the assumption that at least some of the virus containment measures will be needed throughout the forecast horizon, the damage to the tourism industry is likely to be protracted.
Please follow the link for the European Commission’s Autumn 2020 Forecast.
For further information, please contact:
European Commission. Autumn 2020.
Navigator Consulting. 3 November 2020
Navigator Consulting. 3 September 2020
Navigator Consulting. 6 August 2020
Greek Travel Pages. 14 July 2020
European Commission. 13 July 2020