Inflation and nine other sources of internal risks are threatening the Greek economy, Bank of Greece Governor Yannis Stournaras told the central bank’s general meeting, reiterating the possibility of stagflation as “small but not negligible.” In his regular report, he estimated the war in Ukraine will shave one to two percentage points off the country’s gross domestic product this year.
On inflation, the central banker said it appears to be obtaining a more permanent character and is having a negative impact on disposable incomes, consumer and investor expenditure, profit margins, the returns of assets, real wealth, tourism inflows and eventually the growth rate. It would also bring monetary policy back to normal and raise the cost of borrowing.
Besides inflation, however, he pointed to a number of internal threats that result from structural problems in the Greek economy and from the recent debt crisis. These risks are: the possibility of economic lagging if reforms and growth do not meet requirements; a sudden increase of the already high debt-to-GDP ratio; the sizable stock of bad loans; the accumulation of private debt; the low structural competitiveness; the large investment gap; the failure of education to follow the global employment market; the possible inability of the public administration to absorb the European recovery resources in time; and the long delays in the justice system.
The Bank of Greece projects in its baseline scenario that the 2022 GDP growth will be 1.9 billion euros lower due to the high inflation rate and the Russian war in Ukraine, while the adverse scenario doubles the impact to €3.8 billion.
Therefore Stournaras announced that against a previous forecast for 4.8% growth this year, the central bank anticipates the economy to expand 3.8%, while if the adverse scenario materializes, growth will come to 2.8%. Inflation is projected to rise to 5.2% (baseline scenario) or 7% (adverse scenario), up from 4.1% in the previous forecast. The Bank of Greece estimates the primary deficit in 2021 was actually at 6.2% of GDP and not 7%, as the budget had it.