The growth prospects of the Greek economy remain positive, even though a slowdown is expected in 2005 due to weaker investment activity compared to the particularly high rates of increase in the last two years, the National Bank of Greece (NBG), the country’s largest, says in its latest information bulletin, out yesterday. «With the end of the Olympic Games, the Greek economy continues on its exceptional growth path that has averaged 4 percent for the last six years, fueled mainly by strong domestic demand, especially private consumption, and a buoyant shipping sector… Growth is likely to slow to 3-3.5 percent in 2005, however, as the period of high construction spending is coming to an end, with residential construction cooling off at the same time as the preparations for the Olympic Games come to an end,» said NBG. Investment flat Investment growth is expected to remain broadly flat during 2005, with business investment and projects financed by EU structural funds – more than 19 billion euros in the pipeline until 2007 – partly offsetting the decline due to the end of the Olympic Games, says the report. Furthermore, sizable increases in real disposable income, with wage increases in the region of 3.5 percent in real terms, and rising household borrowing will continue to maintain private consumption in 2005, as in 2004. Business sector confidence appears more vulnerable to the uncertainty surrounding the post-Olympic Games economic environment and is expected to fade further in the second half of 2004, most likely reflecting the significant weakening of construction activity, says the report, noting that increasing concerns regarding excess supply in residential construction are reflected in a 2.3 percent decline in prices in the Athens area in the first quarter of 2004 after several years of rapid increases. However, «a major adjustment in housing prices is unlikely,» it adds. Although business investment was the most dynamic component of investment in the first half of 2004, it too is likely weakening as profit margins have suffered due to labor costs rising faster than prices, and higher energy prices. Sales, however, remain strong. The report notes that capacity utilization, which traditionally follows business investment closely, continues to decline and is now near its lowest level of the past two-and-a-half years. These developments are also reflected in a decline in the Production Managers Index in manufacturing for a third consecutive month in July, but which remained above the level of 50 that signifies zero growth. External sector a drag The external sector of the economy has been a drag on growth, with net exports subtracting 1.3 percentage points from growth in 2003 and 0.8 percent in the first half of 2004. The performance of the export sector was mixed, notes the report. «On the one hand, Greek shipping continues to be buoyant, taking advantage of the booming international commodities trade and the concomitant rise in freight charges, adding nearly 1 percentage point to activity in 2004 – an impressive boost that is unlikely to be repeated in 2005. «Tourism, on the other hand, appears to have failed to live up to expectations for this Olympic year. Estimates for foreign tourist arrivals in the first half suggest a deceleration in the region of 5-8 percent, as the sector appears extremely vulnerable to the euro appreciation, competition from neighboring countries, especially Turkey and Croatia, as well as security concerns internationally. This slowdown is likely to be counterbalanced by an increase in the average price of tourism services, especially owing to above-average-budget tourists visiting Greece for the Olympic Games. Overall, we expect a small increase in tourism revenues in 2004… Next year should be better,» NBG says. The report also notes that goods exports have performed well, assisted by the development of new markets in a rapidly growing SE Europe. Furthermore, despite the fast growth of recent years, employment increased only 1.7 percent in 2003 and unemployment remained high at 9.5 percent at the close of the year. «This points to large gains in productivity – around 2.5-3 percent annually. One explanation is that Greek firms are increasing their competitiveness to offset the impact of the large wage increases, in real terms, of the past several years, as well as the appreciation of the currency in real terms.» Finally, NBG notes that due to strong domestic demand, combined with a significant rise in labor costs per product unit, core inflation is expected to remain relatively high until the end of the year, posting a 3.5 percent average for 2004. Headline inflation is projected to hit an average of 3 percent. Further improvement in the growth prospects of the economy will depend on progress in introducing structural changes, including tax reform, a more flexible labor market, measures promoting entrepreneurship and new privatizations.