OECD report predicts slower growth, urges measures to boost competitiveness

Greece’s economy will continue to grow faster than the eurozone average after the Olympics, but the rate of growth will fall below 4 percent, the Organization for Economic Cooperation and Development (OECD) has forecast in its semiannual Economic Outlook report released late yesterday. Here, in full, is the statement released by OECD concerning Greece: «The economy continued to expand briskly in 2003, with robust domestic demand compensating for weak exports. Nevertheless, the general government deficit rose to 3 percent of GDP. «Activity is set to slow somewhat in the period ahead, as Olympic Games-related investment comes to an end, but growth will continue to outpace the euro area average. «Inflation is likely to average around 3.5 percent over the projection period and the large current account deficit is expected to narrow gradually. «Meeting the objectives of further fiscal consolidation and a lower public debt-to-GDP ratio will require much stricter control of public finances, for which the completion of pension and tax reforms and further improvements in administrative efficiency are indispensable first steps. «Together with measures to strengthen labor market flexibility, enhanced competitiveness and innovation are also required to ensure non-inflationary growth and the convergence of incomes to European Union levels over the medium term. «Domestic activity has remained solid as GDP growth comfortably exceeded 4 percent in 2003, led by a surge in domestic demand. «Investment spending has remained buoyant on the back of low real interest rates and strong construction activity associated with the preparations for the 2004 Olympic Games and the implementation of the Third Community Support Framework Program 2002-06. «Consumer spending has also continued to grow briskly, underpinned by strong consumer credit, tax cuts, and rising employment. With foreign demand weak, net exports have made a negative contribution to growth. «The current account – though narrowing significantly from the previous year – has remained high, at approximately 6 percent of GDP in 2003. «Labor market conditions improved further in 2003, with the unemployment rate falling to its estimated structural rate of around 9.5 percent. «Owing to a large extent to the appreciation of the euro, core inflation declined to 3 percent in 2003, from 3.6 percent in 2002, decelerating further in early 2004. It has nevertheless remained significantly above the euro area average, with the differential for 2003 standing at around 1 percentage point. «Harmonized consumer price inflation has also trended downwards, falling to below 3 percent in early 2004. «Monetary conditions have remained relaxed, despite the strong euro, as real short-term interest rates turned negative in 2003. A slowdown was recorded in the pace of credit expansion to households in the course of the year, although both consumer and housing loans were still growing by around 25 percent in December 2003 (year-on-year). «On the fiscal side, revised official estimates indicate a general government deficit of around 3 percent of GDP for 2003, against a budgeted 0.9 percent of GDP. «This deviation largely reflects overruns in expenditure, including for the Olympic Games, as well as lower-than-programmed EU financing for public investment spending. «The 2004 budget incorporates new tax-cutting measures and social benefit increases so that OECD projections are for a further fiscal easing this year, while the ending of the Olympic Games and higher structural funds inflows should reduce the underlying deficit in 2005. «Economic activity is expected to lose some of its momentum over the projection period, as Games-related investment comes to an end. «The rate of expansion will continue to outpace the euro area average, with GDP growing at 4 percent in 2004 and 3.5 percent in 2005. «Easy monetary conditions, in conjunction with a faster implementation of the EU structural fund projects and further decline in unemployment, are expected to maintain domestic demand relatively robust in the post-Olympics period. «Household debt ratios, though they have risen strongly in recent years, remain low by international comparison and have room to move up further in the adjustment to a post-European Monetary Union equilibrium. «Consumption spending should be further boosted by the tax reduction and income support measures included in the 2004 budget. Despite ongoing losses in cost-competitiveness, exports are set to pick up significantly in response to the revival of world trade, virtually eliminating the drag from the external sector on output growth by 2005. «Given growth above potential, the main uncertainty attached to the projections is whether inflation can be contained to around 3 percent.»

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