BUSINESS

GDP to shrink by another 4.4 pct

Brussels forecasts that economic activity will continue to suffer, but prices may drop a little By Sotiris Nikas

Recession will bite once again this year as the European Commission expects the economy to contract by 4.3-4.4 percent, according to an economic outlook report published on Thursday.

The Commission stresses the need for bolstering competitiveness and forecasts that unemployment will swell further. It also anticipates a 22 percent cut in private sector wages while expecting a deflation rate of 0.5 percent.

The 4.3 percent estimate in the report is identical to that the International Monetary Fund used for its Greek debt sustainability analysis, although the Commission has included a chart showing Greece?s economy is expected to shrink by 4.4 percent this year, down from 6.8 percent in 2011. The previous forecast by Brussels had the contraction at just 2.8 percent for this year.

Sources in Athens suggest that the Finance Ministry already expects the country?s gross domestic product to contract by more than 5 percent in 2012, while the official creditors? representatives in Athens -- also known as the troika -- see it shrinking by over 6 percent.

Economic activity in 2011 proved ?much weaker than projected in the economic forecast of last [fall],? the Commission report said. This decline is attributed to three factors: a drop in domestic demand resulting from the decline in incomes, limited access to credit for the private sector, and the continued adjustment of the labor market.

For 2012, Brussels believes that besides the weakening of external demand, internal demand will contract further given the planned salary cuts in the private sector -- which the European Union itself has imposed on Greece in association with the International Monetary Fund.

The report notes that unemployment among young people comes to about 50 percent and that this is one of the biggest problems that should be tackled. It adds that the cost of labor will decline by about 15 percent in the next three years.

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