Moody’s Analytics: How much the war affects Greece – The three scenarios – News – news
Moody’s Analytics is trying to “measure” the consequences of the war in Ukraine on the Greek economy, assessing that inflation is the big “thorn”.
The first estimate of inflation in March shows the largest increase since 1996. According to Eurostat, the harmonized index of consumer prices increased by 8% after an increase of 6.3% in weight based on February. Although the base effects are still valid (there was 2% deflation in March 2021), the harmonized index shows almost record inflation. On a monthly basis, prices increased by 2.7% compared to February. The jump in energy prices is added to the already huge increase during 2021, while prices are not going to fall any time soon.
The invasion of Ukraine will have a huge impact on Greek inflation and will not wipe out disposable income. The duration and magnitude of energy upheavals imply a strong pass-through in general values. Combined with the upward pressures on world food prices, annual inflation will reach prices above 8% in the second and third quarters!
Wage pressures will change momentum in 2023 as workers buy their lost purchasing power. Moody’s Analytics predicts that the Greek harmonized Consumer Price Index will close at almost a record 7.7% in 2022, before normalizing to 2023 in 2023 and then converging to the Central Bank’s 2% target.
On the other hand, unemployment is at its lowest level in decades. According to Eurostat, in February, monthly unemployment stood at 11.9%, down by 90 basis points from January and the lowest recorded unemployment rate since 2010.
The issue of development
At the same time, Moody’s Analytics reports that Greece recorded extremely strong growth in the fourth quarter of 2021, with real GDP growing by 7.7% on a large basis. Real GDP was revised downwards for the second and third quarters. According to ELSTAT, for the whole of 2021 the country recorded the highest growth rate in its history, increased by 8.3% compared to 2020 and very close to our forecast for 8.2% published in September 2021. Growth mainly in strong investment and exports.
After two years of pandemic crisis, Greece’s real GDP is marginally above its pre-pandemic level and while the economy is trying to stand on its own two feet and move towards expansion, another international crisis has arrived: The invasion of Ukraine is a significant threat to the world economy and is already polarizing Greek public opinion.
The military conflict in Ukraine reduced Moody’s Analytics forecast for the growth of Greek GDP for 2022 to 4.5%, which is 0.8 percentage points lower than the basic level of February. The prospects for the tourist season in 2022 are less optimistic. Although the sector exceeded expectations in 2021, challenges will arise due to international inflationary pressures and the Ukrainian crisis. Almost a quarter of the decline in GDP growth compared to the baseline scenario in February comes from the case of zero tourist arrivals from Russia, which translates to about 400 million euros less revenue in 2022. This assumption was incorporated in the forecasts. of the house in March. Greece deported 12 Russian diplomats in April and bilateral relations are on the verge of collapse.
The scenarios
In the baseline scenario, Greek GDP growth remains above potential until 2024. After overheating for five years, the Greek economy sees its annual inflation around its target ΕΚΤ by 2026, while unemployment reaches its natural level. Strong growth and market confidence are reflected in bond yields, allowing the government to borrow at low interest rates and settle its debt. By the end of 2024, the debt-to-GDP ratio has fallen below 170% and the deficit converges to zero. GDP has 4.5% in 2022 and 2.8% in 2023.
In the optimistic scenario, the military conflict in Ukraine is resolved much faster than expected. As a result, geopolitical tensions are declining earlier than expected under the baseline scenario. Sanctions are being lifted quickly, backed by supply lines for basic goods from Russia. The complete weakening of the pandemic and geopolitical tensions leads to a strong recovery in demand, especially in the service sectors, driven by households spending their surplus savings. In this scenario, Greek GDP expands by 5.7% in 2022 and by 3.9% in 2023.
In the unfavorable scenario, the military conflict between Russia and Ukraine is proving significant and persisting for longer than expected. The threat of a major disruption to global commodity supplies keeps oil and gas prices high for Europe, causing inflation to accelerate significantly above key levels. Another variant of the coronavirus occurs in winter and causes a return to measures of social distancing at home and abroad. Political instability is causing multiple rounds of elections that hit the economy in 2023 and significantly increase debt costs. The disposable income of households is squeezed and households significantly reduce their expenses. Denials of falling wealth from European stock market spending further discourage Europeans from spending. According to this scenario, GDP has only 1.9% in 2022 and shrinks by 1.5% in 2023.
The factor of elections
Before leaving power, the Tsipras government changed the electoral law so that there would be no bonuses for the party that wins the election, making it more difficult to form a one-party state and forcing winners to form coalition governments or run for re-election until a government is formed. . Mitsotakis overturned this law, but due to constitutional restrictions, the overthrow will take effect only after the next election cycle.
If Mitsotakis can stabilize or increase his turnout in the polls, early elections could be avoided and the Greeks who will go to the polls in 2023. Without the bonus seats, the winner of these elections will probably have to win support of the opposition for a coalition government or to face a second election or even a third round. If there is a second round, we assume that the Greeks will want to avoid the permanent elections that will further hit the economy. A third round is therefore a queue risk. But if there is a third round, the economic outlook for 2023 will change significantly, with downward pressure on GDP due to certainty, higher interest rates and public debt.
Investments and Recovery Fund
Greece has enjoyed a two-year machine in terms of fixed investments and this trend will continue in the coming years, explains Moody’s Analytics. The ratio of investment to GDP was about 10% before the pandemic. It is estimated that at the end of 2021 it has been set at 13%. Despite the upward trend, investment is still lacking compared to before the financial crisis, when the ratio of investment to GDP was around 20%.
In early April, Greece received the first tranche of 3.6 billion. euro from European recovery funds aimed at developing infrastructure to support digital transformation and green investment. Political stability will be an important factor in this development. In general, investors are negative about high risks. The possible reversal of investment-friendly laws in favor of possible popular tendencies that focus on election results could very quickly reverse progress.
Source ot.gr