Greece's battered economy will keep shrinking until mid-2013 as fiscal belt-tightening continues to weigh while austerity fatigue may hamper the pace of reforms, the OECD projected in its May outlook on Tuesday.
The twice bailed-out country is headed for crucial elections on June 17 that could determine if it continues to get funding from its currency partners and remain in the eurozone.
The forecasts by the Paris-based Organization for Economic Co-operation and Development assume Athens fully implements a European Union/International Monetary Fund plan of reforms under a 130-billion-euro rescue package to make its economy more competitive and repair public finances.
"The economy is set to contract until mid-2013 due mainly to needed fiscal retrenchment. Growth may turn positive in the second half of 2013,» the OECD said, expecting a deeper downturn this year than the country's central bank and the EU Commission.
The OECD sees the Greek economy shrinking 5.3 percent this year after a 6.9 percent slump in 2011. The Bank of Greece and the EU Commission expect a contraction of 5.0 and 4.7 percent, respectively, this year.
While growth may return sometime in the second half of 2013, the OECD projected a 1.3 percent contraction for the year as a whole, extending Greece's recession into a sixth year. The EU Commission's full-year projection sees flat GDP growth.
Structural reforms should begin to bear fruit by the middle of next year while bigger use of EU structural funds would help jump-start the economy, the OECD said.
OECD chief economist Pier Carlo Padoan urged Greece to stick to the program of reforms it agreed on with its international lenders.
"Greece must stay in the eurozone. This requires the government to implement -- and I stress to implement -- the program agreed with the troika and other countries,» Padoan told Reuters in an interview.
"Staying in the eurozone will be costly, but leaving the eurozone will be much more costly for Greece and for the other countries,» he said.
Weak demand is expected to brake consumer inflation which is seen slowing to an annual 0.8 percent pace in 2012, with deflation likely to set in by next year.
Unemployment is seen at 21.2 percent this year, rising to 21.6 percent in 2013. The OECD expects higher joblessness than the EU Commission, whose spring forecasts project rates of 19.7 and 19.6 percent for 2012 and 2013.
The current account gap, one of Greece's twin deficits and a sign of eroded competitiveness, is expected to narrow to 6.5 percent of gross domestic product (GDP) next year from an estimated 7.6 percent in 2012.
Looking at risks, the OECD said rising social discontent with austerity could hamper the implementation of reforms.
"A further weakening in the banking sector's already limited capacity to support growth also poses a major risk to the outlook,» it said. [Reuters]