IOBE says economy doing better than was expected
International organizations monitoring the Greek economy (including the European Union and the Organization for Economic Cooperation and Development in particular) are revising upward previous forecasts and predicting that it will perform equally well this year as in 2005, the Foundation for Economic and Industrial Research (IOBE) said in its latest report. Private consumption is seen again as the main contributor to growth, projected to rise by 3.1 percent, while investment is seen as rising slightly from the rather low levels of 2005. The uncertainties accompanying such predictions, says IOBE, are related to the international environment, particularly oil prices, as well as factors that could dampen consumption and investment, such as continued rises in interest rates. IOBE, a think tank sponsored by the Federation of Greek Industries, notes that its surveys of corporate forecasts have shown a steady improvement in the first five months of 2006 and then a return to the levels before the steep decline after the Olympic Games of 2004. In contrast, however, consumers’ views remained unfavorable during the same period, with the Consumer Confidence Index hovering at levels even lower than those of 2005. This consumer pessimism is apparent in their responses on all issues, particularly as regards their own financial situation and the country’s economic performance over the next 12 months. IOBE argues that the consistent application of structural changes in the economy by the government is the prerequisite for their success. «The measures already implemented have likely contributed to the improvement in the climate shown. However, their substantial impact will begin being felt when they are fully activated,» it says. It notes, however, that this prospect is subject to uncertainties mainly related to political factors, with local government elections in the autumn and the possibility of early national elections. The report notes that 2005 was marked by considerable progress in fiscal adjustment, with the budget deficit falling from 6.6 percent of gross national product in 2004 to 4.3 percent last year. Efforts to further lower the deficit to below 3 percent in 2006 are subject to uncertainties regarding both revenues and expenses. First-quarter data, nevertheless, was encouraging, showing a steep rise in revenues and a fall in expenses, IOBE notes. (However, revenues in April and May fell far short of targets.) Inflation Inflation slowed down in the first months of 2006 compared to the same period of 2005, despite the steep rise in oil prices. This slowdown, according to IOBE, is expected to continue throughout 2006, on the condition that there is no further steep rise in the price of oil, and is mainly due to a cap on price increases in the services sector of the economy. Core inflation (which excludes the impact of oil prices) has fallen at an even steeper rate, which is explained by four factors: first, that firms have passed only part of higher oil costs on to consumers; second, that pressures from still strong demand have eased; third, that import prices have fallen, and fourth, the recovery of the euro vis-a-vis the US dollar from lower levels in 2005. However, despite these favorable developments, IOBE notes, Greece still has a higher inflation rate than the EU average, as the factors which account for this divergence are still present. On the other hand, the cycle of interest rate rises which the European Central Bank has begun is seen as bringing an easing of asymmetrical inflationary pressures.