Greece’s fitter economy

OECD Observer

Though legend has it that the ancient Olympic Games were founded by Heracles, a son of Zeus, the very first Olympics of the modern era took place in Athens, in 1896. The government at the time was unable to fund construction of a stadium, so a wealthy architect donated a million drachmas (over $100,000) to restore and use the Panathenaic Stadium, originally built in 330 BC.

There were no such complications in 2004when the Olympic Games returned to their birthplace, complete with a new state-of-the-art Athens sports complex centred on the Olympic Stadium, with its futuristic roof. It is too early to determine the precise impact the 2004 Games have had on Greece, though their positive effect may have eased off.

Take growth, for instance. Real GDP grew by3.7% in 2005, which is slower than 2004when it expanded by nearly 5%, although it remains well above the euro area average. This deceleration mainly reflects a sharp decline in public investment after the Olympics. Gross fixed capital formation fell by around 1.5% in 2005, after an annual average increase of some 8% over the previous five years.

Consumption growth, while no doubt fuelled by some festive spending among households, also eased back a little in 2005, though remaining buoyant on the back of still rapid credit expansion. Weaker demand has affected the external sector, too, as import growth faltered after a spurt in 2004. The result is that net exports have added to output growth. In the meantime, the current account deficit has widened, mainly as a result of a burgeoning trade deficit from higher oil prices, despite a small increase in the surplus on the services balance.

Those higher oil prices, and to a lesser extent an increase in indirect taxes in April 2005, lifted consumer price inflation to about 3.5%for the year as a whole. However, the weaker pressures from domestic demand, together with subdued growth in unit labour costs, put a lid on core inflation. In fact, the differential with the euro area, which averaged approximately 2 percentage points in 2005, has narrowed significantly in early 2006. On the other hand, unemployment, at some 10.5% in 2005,remains high by international standards, even if the rate has eased.

As to the government’s fiscal position, this improved markedly in 2005 with the general government deficit shrinking by2.5 percentage points of GDP to 4.5%.This reduction was achieved despite underperforming tax revenues and can be tied to the sizeable drop in public investment outlays after the Olympic Games, accompanied by a restrain in the growth of primary expenditure. The government’s stability programme aims to lower a deficit of2.6% of GDP targeted for 2006 to gradually below 2% by 2008, though there is a risk that the deficit will come in a bit higher.

Though Greece might not be hosting the Olympics again for a while, the outlook for the economy remains positive. In fact, a rebound in investment activity from post-Olympic lows is expected, compensating for a likely deceleration in consumption as a result of fiscal retrenchment. Low interest rates, and a number of investment-boosting policy initiatives, including a gradual lowering of corporate tax rates, a recent law providing fiscal incentives for private investment projects, and legislation covering public-private partnerships, should bolster domestic activity.

Exports are set to rise, despite some further deterioration in cost-competitiveness, though import growth should also pick up as domestic demand firms, causing the net effect of the foreign balance on growth to turn slightly negative. Still, real output is projected to outpace the euro area average by a decent margin.

Two major domestic uncertainties affect this outlook. First, will inflation indeed ease? And second, will the fiscal position improve as intended? The answers largely depend on government action, though the risks on the external side from oil prices and the resilience of global growth could also pose a challenge. RJC

The next forecast for Greece, complete with data, will be published in the OECD Economic Outlook No. 79, June. A preliminary edition will be released on www.oecd.org/eco/ on 23 May at the OECD ministerial meeting.

©OECD Observer No 255, May 2006




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