IOBE places faith in investment incentives

The post-Olympic skepticism that succeeded the pre-Olympic optimism on the economy is reflected in the deterioration of the business climate in important sectors of the Greek economy but the overall prospects for 2005 remain positive, the Foundation for Economic and Industrial research (IOBE) said in its quarterly report yesterday. According to IOBE, April saw the Economic Conjuncture Index shoot to 115.4 points – a three-year high – but then begin declining, ending at 93.7 points in September. The October recovery proved transient, as the index declined further to 92.1 points in November, lower than the eurozone average. The deterioration was especially marked in the construction sector and IOBE partly attributes this to psychological reasons. «The sudden upsurge in expectations that is fueled by one-off external factors (Olympic Games, elections) is usually accompanied by impatience, which in the short term, when there is no sufficient time for the realization of the expectations, leads to the other extreme, to a sudden fall in optimism. On the other hand, there are indications that more moderate expectations are linked to enterprises’ commensurate estimates regarding demand levels,» said IOBE. According to the report of the employers-sponsored think tank, the 2005 budget and the two economic draft bills, on tax reform and investment incentives, give an outline of a moderate economic policy as regards fiscal adjustment, and of a bolder one as regards economic development. The initial impact of these draft documents appears neutral so far, IOBE says. However, when economic policy begins to be implemented without deviations and in line with the targets set, it is likely to have a beneficial effect on key indicators such as the public deficit, the tax burden and investment. IOBE forecasts an economic growth rate of 3.5-4 percent for 2005 but warns of a number of risk factors. On the one hand, low interest rates and consumer credit are considered capable of maintaining consumption at a high level and of keeping private and public investment rising. On the other hand, IOBE notes a degree of uncertainty as regards consumption and investment. The consumption growth rate may be lower than forecast and investment growth will slow down, even though the beneficial effects of the new incentives law cannot be reliably assessed at this stage. Nevertheless, the authors of the report are encouraged by the fact that the law «introduces changes which are neither piecemeal nor random.» «Its main goals are to speed up the processes of modernization, innovation and restructuring of existing units, bolster investment activity in new sectors with large growth opportunities, speed up tourism development, particularly its qualitative upgrading, and boost investment by small and medium-sized enterprises, which are expected to make a substantial contribution to growth and employment in particular. «The philosophy permeating the law makes it a strong instrument for growth… The main point is to ensure its effectiveness, which does not depend on the options of the law itself but on a series of other factors,» concludes IOBE.