Economy may stumble on low investment, trade

Inadequate investment, lack of competitiveness and high oil prices are major obstacles that could derail the Greek economy in 2006, according to a report by EFG Eurobank economists. Despite these caveats, the Greek bank’s economists are optimistic overall about the economy’s prospects this year. They believe the expected recovery in investment, including, crucially, state investment, will balance out the expected external negative developments (higher current account deficit) and a slowdown in demand growth. Still, they forecast lower GDP growth for the year (3.4 percent) than what the government expects. The main risk factors affecting this estimate are: – Weaker-than-expected recovery in investment after a negative year. – A greater-than-expected effect of the negative current account balance due to the economy’s worsening competitiveness. – The likely worsening of the international economic environment as a result of high oil prices and the persistence of large structural inefficiencies on a global scale. The report estimates that inflation will fall slightly due to a stricter wage policy in the public sector and the effects of structural reforms. Despite this likely outcome, Greek inflation will continue to outstrip the European average by a wide margin, contributing to the further erosion of the economy’s competitiveness. The government’s goal to reduce the 2006 budget deficit to levels slightly below 3 percent of GDP in order to conform to eurozone rules is feasible even under the bank’s conservative GDP growth estimate. According to the bank’s economists, this goal can be achieved if revenue growth is equal to or exceeds nominal GDP growth and if primary government spending growth stays within the limits prescribed by the 2006 budget. However, if revenue growth lags again – as it did in 2005 – the government may resort to extra fiscal measures, such as raising taxes, during the year. The report says the drive for reforms accelerated significantly in 2005: Among these, the bank mentions the flexibility given to work hours, the reduction in the cost of overtime, banks’ auxiliary pension funds (even though the law in question has not been implemented yet) public-private partnerships, extended shopping hours and the law reforming non-listed public utilities. This year, the government’s main challenge is the smooth implementation of the above reforms. However, says the report, the reformist zeal may abate in the second half of the year ahead of the local government elections. Other challenges include the low absorption rate of EU funds, the privatization of the remaining state-controlled banks and Olympic Airlines and further changes in working hours.

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