Recession may stretch into 2014

According to a forecast released on Tuesday by Morgan Stanley, Greece’s economy will not rebound in 2014 but instead faces one more year of recession amounting to 1 percent.

This runs counter to the positive outlook created by the improving economic climate and expectations for the country as described in a European Commission report issued in December, as well the government’s plans for growth next year.

As Greece enters its sixth year of recession, Finance Minister Yannis Stournaras has said that the economy’s rebound will begin at the end of the year. His view has been echoed by many international firms and authorities who expect the country to bottom out this year. However Morgan Stanley, credited with successful forecasts in cases such as the eruption of the crisis in the US in 2008, is more pessimistic.

It predicts that there will be a more radical official sector involvement (OSI) in a future Greek debt restructuring, as last month’s decisions for a milder OSI combined with the bond buyback have only given official creditors the chance to disburse their funds for Greece. The US bank notes in its report that the weight of the debt remains very heavy but the new OSI will depend on the elections timetable in Europe (Germany is set to go to the polls in September).

Morgan Stanley expects that the pressure of austerity in Greece will begin to decline this year, which might also see a primary surplus. The GDP contraction will come to 4.5 percent, it says, matching the forecasts by the Greek government and the European Commission. Yet the bank also identifies political risks that may cause problems, saying that political and social support for the government will be key to the success of the streamlining plan.

In December the Commission had put the economic climate index for Greece at 84.1 points, a level unseen in almost three years, since January 2010. The country remains well below the long-term European average of 100 points, but it is much closer to the eurozone average of 87 points. Commenting on this result, Reuters said that although there is still a long way to go for Greece, it may now be on the right track.