The European Commission sees the Greek economy contracting by 4.4 percent this year and unemployment rising to 27 percent, with the public deficit reaching 4.6 percent of GDP.

In its winter economic forecast for the EU, the Commission outlined how it expects 2013 to be another challenging year for Greeks, when the debt-to-GDP ratio is expected to rise to 176 percent of GDP

“Investment is likely to continue underperforming in the short-run, as the majority of businesses still face liquidity constraints or wait to see more evidence of a pick-up of the economy,” the EU’s executive arm said.

“Though exports are projected to grow as the economy is improving its competitiveness, they are likely to remain subdued due to still weak external conditions. It is expected that these factors will continue to dominate for most of 2013, only partially compensated by the reversal of the liquidity squeeze, notably as the government plans to repay arrears for an amount of up to 4 percent of GDP.”

The Commission expects to see the Greek economy recover in 2014, when it is forecast to grow by 0.6 percent. Brussels thinks unemployment will fall to 25.7 percent next year. The public deficit is projected to drop to 3.5 percent of GDP.

“This reflects ongoing positive supply-side developments,” said Brussels. “Reductions in unit labour costs (due to far-reaching labour market reforms) and product market liberalisation are expected to create new business opportunities and to encourage job creation once the economy picks up.

“In addition, the bank recapitalisation process and the overall stabilisation of the country are setting the preconditions for a return of capital to the country and renewed credit flows to the private sector. With a large part of the fiscal consolidation effort already legislated, consumers and investors appear to start regaining confidence which should strengthen domestic demand in 2014.”

Greece is implementing austerity measures worth 7.2 percent of GDP this year and next.

The European Commission also forecasts that further labor market reforms will lead to compensation per employee falling by 7 percent this year and 2 percent next year.

This will contribute to deflation of 0.8 percent this year and 0.4 percent in 2014.

The current account deficit is expected to decrease from 7.7 percent of GDP in 2012 to 4.3% in 2013 and 3.3 percent in 2014.

The Commission says there is a possibility recovery will begin in 2013 rather than 2014 but warns that depressed demand may also trigger higher unemployment.