The Bank of Greece marginally increased its estimates by 0.1% for the growth of the Greek economy this year, also marginally raising its forecasts for inflation in 2025.

In particular, as stated in the Interim Monetary Policy Report, this year the Greek economy is expected to record a growth rate of 2.3%, and 2.5% in 2025. For 2026, the Bank of Greece predicts that growth will decline slightly to 2.3% and to 2% in 2027.

As mentioned, the main component of economic growth is estimated to be consumption, while investments and exports will continue to contribute positively. Overall, the net contribution of the external sector to GDP will be slightly negative in the coming years, as strong investment activity and stronger consumption are expected to cause imports to grow at rates matching those of exports.

In terms of inflation, based on the Harmonized Index of Consumer Prices (HICP), in 2024 it is expected to be 3.0%, from 4.2% in 2023, reflecting the large slowdown in food inflation. By 2026 inflation will converge towards the ECB’s target (2%), but remain slightly above it. Inflation in services is expected to be more persistent than inflation in other HICP components, mainly reflecting expected increases in labor wages. Finally, core inflation is expected to ease significantly to 3.5% in 2024 and 3.1% in 2025, reflecting the deceleration mainly in non-energy industrial goods inflation.

Risks and uncertainties

As regards the risks surrounding the Bank of Greece’s macroeconomic forecasts for growth, it is noted that they are mainly downward and linked to: (a) any worsening of the geopolitical crisis in Ukraine and the Middle East and its effects on the international economic environment , (b) strengthening of trade protectionism internationally, (c) lower than expected rate of absorption and utilization of RRF funds, (d) intensifying tightness in the labor market and possible wage pressures, (e) slower than expected implementation of the necessary reforms and (f) possible natural disasters due to the climate crisis.

Challenges

According to the BC Report, the successes recorded in recent years are an indication that the economy is on the right track. However, it is emphasized that the economic recovery effort from the ten-year debt crisis has not been completed. In real terms, both GDP and GDP per capita still lag behind pre-crisis levels and their convergence with the European average requires even stronger growth rates.

Additionally, several domestic structural weaknesses, some of which predate the debt crisis, remain. For example, the lack of competition in several sectors of the economy, which exacerbates the international problem of punctuality, high public debt, a large investment gap, low savings, low structural competitiveness that worsens the balance of current transactions, the low participation rate of women and young people in the labor force and the aging of the population, which increase the tightness of the labor market over time, are factors that limit the growth dynamics of the economy.

To these domestic weaknesses are added global challenges, such as the intensity of geopolitical confrontations, geo-economic fragmentation and the revival of the trend towards trade protectionism, the climate crisis, energy security, the transition to a sustainable and circular economy, as well and the advance of new digital technologies and in particular artificial intelligence.

Policy proposals

Taking into account the above, economic policy should remain focused on safeguarding fiscal credibility and stability and implementing the required investments and reforms foreseen in the National Recovery and Resilience Plan “Greece 2.0” and which will facilitate the green and digital transition of the economy and the acceleration of the growth rate in the coming years. At the same time, this will ensure the gradual improvement of the credit rating of the Greek economy.
However, while timely absorption and effective utilization of RRF resources is critical to the economy’s trajectory in the coming years, it is not sufficient to make up for the lost ground of the decade-long debt crisis. Consequently, additional actions are needed to address the inherent weaknesses of the Greek economy and to achieve sustainable economic growth.

Indicatively, demographic aging is expected to shrink the proportion of the working-age population. This requires the adoption of active labor market education and training policies and programs aimed at increasing the participation of women and young people in the workforce. At the same time, however, targeted policies regarding the integration of immigrants and the attraction of foreign workers are needed to address the already observed labor force shortages in the agricultural sector and in sectors related to tourism and construction.

Given the constraints posed by demographic developments, an increase in labor productivity is required in order to maintain growth momentum. The increase in investment is a decisive factor in enhancing labor productivity. This presupposes the full absorption and productive utilization of the available European resources. At the same time, however, it also requires the strengthening of the banking sector, so that it can face the existing challenges and effectively finance investments and the growth of the economy. Vigilance is therefore needed to achieve further consolidation of bank assets and to avoid new net inflows of non-performing loans. In the same context, it is particularly important to diversify the sources of financing by expanding microcredit and access to alternative forms of financing through the capital markets to meet the investment needs of small and medium-sized enterprises, especially start-ups and innovators, who do not have tangible collateral to receive bank loans.

Due to environmental challenges and climate change, it becomes particularly important to improve the overall productivity of production factors, as it allows maintaining or increasing the standard of living, while protecting natural resources and the environment.

In order to enhance the overall productivity of the economy, it is necessary to improve education and training, especially in new technologies, in order to increase human capital. In addition, labor and capital markets should operate in such a way that the most productive firms in each sector are able to attract the most labor and capital. This process ensures that the best firms will thrive while the less efficient ones will exit the market. This is the so-called “distributive efficiency”, which implies an increase in overall productivity and economic progress. Conversely, if labor and capital remain in relatively unproductive firms, the economy and productivity gradually decline. This may occur if, for example, the labor market is characterized by excessive regulation, if unviable firms continue to operate, thanks to favorable provisions or barriers to entry for new firms, or if new, more dynamic firms have difficulty accessing finance .
Critical to long-term development is also addressing other issues that impede the efficient allocation of resources. Such issues are polynomialism and mismanagement, delays in the administration of justice, the unclear spatial framework, the incomplete connection between education and the labor market, deficiencies in infrastructure, the high cost of electricity, the high tax burden on labor income and the increased indirect taxes.

In addition, it is necessary to strengthen the extroversion of the economy, as the access of companies to the global market gives them the opportunity to exploit economies of scale and to strengthen their technological content, while international competition tends to reward the most productive companies.

However, beyond the above, the improvement in overall productivity comes from increased productivity achieved at the enterprise level through the adoption of better technology, improved management practices and innovative processes. Therefore, businesses that adopt cutting-edge technologies and attract top talent can significantly improve their productivity. But apart from the actions of the companies themselves, government intervention with subsidies and tax incentives is required to encourage the creation of an innovation ecosystem with collaborations between companies, research institutions and universities to promote basic research, but also its commercial exploitation.

In conclusion, increasing overall productivity through reform and innovation, together with increasing investment and labor force participation, is key to boosting economic growth and improving living standards. However, despite the commitment we must show as a country in implementing the required reforms, the response to new global trends and challenges cannot come from each country individually. Instead, a common approach, alignment and cooperation at European level is needed based on the proposals of the recent Letta report on the necessity of completing the Single Market and the Draghi report on the future of European competitiveness. A key condition to address the gap in innovation, productivity and competitiveness and to secure Europe’s sovereignty, security and resilience is the coordination and joint action of European partners, making use of the successful experience of the European recovery instrument NextGenerationEU, the CoE concludes.