OECD praises growth

But risk of high inflation could compromise competitiveness

Greece’s output growth remains robust and should continue to grow above the eurozone average in 2006 and 2007, the Organization for Economic Cooperation and Development (OECD) said yesterday in a report.

“Real output is projected to grow by around 3.75 percent over the next two years, thus outpacing the euro area average by a substantial margin,” the OECD said. The report was published at the start of the OECD’s ministerial conference in Paris, headed by Greek Prime Minister Costas Karamanlis.

In its July 2005 report on Greece, the OECD had seen Greece’s gross domestic product (GDP) growth in 2006 at 3.2 percent.

A rebound in investment activity from lows after the August 2004 Olympic Games is expected to sustain domestic demand, compensating for a likely deceleration in consumption as a result of fiscal retrenchment, the OECD said.

The OECD forecasts Greek average GDP growth at 3.7 percent in 2006 and 3.6 percent in 2007. The Greek government is targeting GDP growth of 3.8 percent in 2006. Greek GDP in the first quarter of 2006 rose 4 percent on the year, boosted in part by an annual 5.3 percent rise in investment.

Commenting on the report, Economy and Finance Minister Giorgos Alogoskoufis stressed as particularly positive that “one more international organization is recognizing the great efforts made in Greece for the containment of fiscal deficits as well as the maintenance of growth and the higher competitiveness of Greek economy.”

But the OECD also said that strong economic growth could be accompanied by relatively high inflation. Although Greek inflation is set to slow, “it will continue to exceed the euro area average — a trend that will at some point undermine competitiveness if it’s not reversed,” the OECD said.

Greece is targeting average inflation of 3.2 percent in 2006.

The other major internal risk for Greece is whether its projected fiscal position improvement will be realized, the OECD said.

The OECD predicts that, based on current policies, Greece’s budget deficit will fall to 3 percent of GDP in 2006 from 4.5 percent of GDP in 2005, but will rise again to 3.3 percent of GDP in 2007.

Greece is targeting a budget deficit of 2.6 percent of GDP in 2006 with a gradual reduction to below 2.0 percent of GDP by 2008.

“Wide-ranging reforms of the pension and health care systems are needed to ensure the sustainability of the public finances,” the OECD said.

Asked about this, Alogoskoufis referred to the social dialogue the government has started. “The dialogue has successfully begun in Parliament with the participation of the main opposition and other parties. This dialogue will continue as the social security problem is one of the oldest problems in the country which we must handle with maturity through dialogue and in procedures of consensus,” he said.

He also made it clear that “it is not the government’s intention to take any other initiatives on the social security issue during this four-year term.” (AP, Kathimerini)