The Greek economy remained on a growth trajectory during the 1st quarter of 2023, with GDP increasing by 2.1% year-on-year, despite the deterioration in the international economic environment. The annual rate of economic growth exceeded the Eurozone average (which stood at 1.0% annually) for the 8th consecutive quarter, with broad support from almost all final expenditure components of GDP.

The slowdown in Greece’s economic growth, compared to the strongest annual growth of 4.8% in Q4 2022 (-0.1% seasonally adjusted change compared to the previous quarter), mainly reflects:

The elimination of the one-time favorable effects on the annual change of GDP that were exerted during 2022 – due to the lifting of restrictive measures against the pandemic – which had given a significant additional, but temporary, boost to the annual change of domestic expenditure.

The negative effect of 2.0 percentage points per annum in the 1st quarter of 2023 from the reversal of the one-off positive effects related to the rapid accumulation of inventories (including other statistical adjustments) that occurred in 2022 (with an increase in the historical a high of 6.2% of GDP in Q4 2022). This strongly positive effect in 2022 was mainly due to the preemptive build-up of energy raw material stocks, amid high uncertainty, as well as the effort of businesses to replenish non-energy stocks that had shrunk due to high demand. This development is, to a large extent, considered temporary and is not expected to be repeated in the coming quarters, at least with the intensity observed in the 1st quarter of 2023.

The exercise of tighter monetary and fiscal policy after two years of strongly expansionary stance – to offset pressures from the pandemic and the energy crisis, which have now subsided – at a time when structural inflation stiffness is leading the ECB to continue hikes interest rates.

Private consumption – the key component of domestic demand – grew by a strong 2.9% year-on-year (+1.4% on a seasonally adjusted quarterly basis) boosted by favorable labor market conditions and falling energy prices. Income developments supported the above trend, with growth in the total remuneration of workers in the economy, in deflated terms, reaching 1.3% per annum in Q1 2023 (+6.3% per annum at current prices), after from an annual decline of 1.8% in 2022, reflecting an estimated rise in nominal wages (by almost 5% annually) as well as employment (by 1.4% annually) in the 1st quarter of 2023 (estimates based on national accounts data linked and from the seasonal structure of employment).

It was also continued increase in non-wage household incomes as well as in business profitabilitywith the combined value of gross operating surplus and gross income growing at a 9.3% annual rate in Q1 2023, decelerating slightly from 14.7% annual growth in 2022.

Strong confidence and attractive yields helped fixed investment grow by 8.2% y-o-y in Q1 2023, reaching 14.5% of GDP – close to a 12-year high (ie 14, 7% of GDP) that occurred in Q4 2022. The driving force was strong construction activity (+19% y/y) – boosted by housing construction which rose 48% y/y – which accounted for around 2/3 of the increase of fixed capital investments in the 1st quarter of 2023, with the remainder mainly due to new investments in transport equipment.

The biggest positive surprise came from net exports, which contributed one percentage point to annual GDP growth in Q1 2023, against an average negative effect of 2.8 percentage points in 2022. It is noteworthy that, in addition to largely, services exports expected to grow by 6.2% year-on-year – driven by strong tourism performance – goods exports rose by 10.6% at constant prices, beating even the most optimistic expectations, to a record high of €10bn. , at constant prices (20.6% as a percentage of GDP).

This performance highlights the strength of the export activity of Greek companies in a less favorable environment, compared to the previous two years, as well as the increasing diversification of the export markets for Greek products and the more general composition of Greek exports.

At the same time, total imports slowed to +5.6% y/y (at constant prices) in Q1 2023, with their negative impact on annual GDP change limited to 2.4 percentage points from 4.6 percentage points in 2022 .The above trends in exports and imports are compatible with our forecast for a significant reduction in the current account deficit in 2023.

An acceleration in the rate of economic growth is expected from the 2nd quarter of 2023

Economic activity, according to available indicators for Q2 2023, provides clear signs of acceleration on both a quarterly and annual basis. In particular, the most notable trends are the following:

The economic sentiment index strengthened to 108.4 in April-May from 106.8 in Q1 2023, widening its positive divergence from the Eurozone average.

Inflationary pressures eased in Q2, with the annual change in the consumer price index (CPI) coming in at 2.9% in April-May from 5.9% in Q1, easing pressures on real disposable income.

Employment growth rose to 1.6% year-on-year in April, up from 1.4% year-on-year in the 1st quarter, while the strongest hiring flow in salaried jobs recorded in the Ergani system for the first 4 months of 2023 portends an acceleration in the rate of growth employment close to 2% in the coming months, with upward wage adjustments continuing.

Arrivals from abroad at Athens International Airport exceeded by 7%, in the two months of April-May 2023, the performance of the corresponding period of 2019, when a record of arrivals and receipts was recorded.

The NBG’s Department of Economic Analysis predicts, keeping its full-year forecasts unchanged, that annual GDP growth will accelerate to 2.5% in Q2 and hover around 3% or higher in Q2 semester. The specific performance is expected to be supported by the more favorable basis of comparison with the 2nd and especially with the 3rd quarter of 2022, during which pressures from energy costs had peaked with a simultaneous weakening of the economic climate.

At the same time, investment spending is estimated to be strengthened amid increasing support from the implementation of investment plans under the National Recovery and Resilience Plan. The main sources of uncertainty, regarding the above basic scenario, are related to a possible weakening of the economic climate and exports – in the event that economic conditions in the Eurozone deteriorate significantly, due to the delayed effects from the exercise of a more restrictive monetary policy – ​​as well as to case of re-emergence of energy uncertainty due to geopolitical tensions.