Greece will experience a recession of 8% this year unless it is hit by a second wave of the coronavirus, in which case the economy will contract 9.8%, before rebounding in 2021, the Organization for Economic Cooperation and Development (OECD) said in a report on Wednesday.
Although Greece responded rapidly to the pandemic, containing the spread of the coronavirus, the lockdown took a toll on the economy, the report argues, recommending that the Greek government cut taxes when conditions allow it.
For 2021 the economic rebound is projected at 4.5% in the baseline scenario and 2.3% in the adverse one, the OECD says. It goes on to stress that the impact on the Greek economy is temporary but significant, as the pandemic has affected tourism as well as production and employment.
According to the baseline estimate, consumption may shrink 5% this year but recover by 4.6% in 2021. Nevertheless, employment will drop 3.5% in 2020 and continue to decline by another 1% next year. Exports will decline 11.1% this year before rebounding 8.7% in 2021.
The report stresses the importance of reforms, calling for the reduction of non-salary costs, i.e. social security contributions, combatting tax evasion to allow for tax rate cuts, the strengthening of social cohesion by reducing high poverty rates, an increase in public investments and a reduction to nonperforming loans and of deferred tax assets in banks. Applying the package of reforms would boost the economy by 5.2 percentage points by 2030, says the report.
The OECD further warns it will be hard for Greek banks to tackle the high stock of NPLs without recording losses in their financial reports and without seeing their capital indexes deteriorate. It recommends that the government finds an integrated solution for handling the deferred tax assets in banks’ reports, as the NPLs will remain in the system even after the state’s asset protection scheme (“Hercules”), noting that the Bank of Greece proposal for a “bad bank” needs to be considered.