OECD report foresees drop in inflation, unemployment

The Greek economy will continue to enjoy strong growth and unemployment will fall, as will budget deficits, but there is a danger that tax reforms will cause revenue to shrink and deficits to rebound, the Organization for Economic Cooperation and Development (OECD) said in a report released yesterday. The OECD also called, once again, for reforms in the social security and pensions system in order to avoid fiscal difficulties in the medium term. The OECD estimates that the country’s gross domestic product (GDP) will grow 4 percent in 2006 and 3.8 percent both in 2007 and 2008. Growth is investment- and consumption-driven. These factors do not appear to have been affected by rising interest rates, the report says. A report released a few months ago by the International Monetary Fund (IMF) also forecast that investments would rebound after having declined in the period immediately following the Athens Olympics. The OECD report also forecasts a decline in inflation as a result of a drop in international oil prices. The inflation rate will average 3 percent in 2007 and 2.8 percent in 2008. The Harmonized Index of Consumer Prices (HICP) used by the European Central Bank will average 2.9 percent in 2007 and 2.8 percent in 2008. It will still be significantly higher than the eurozone average, the report notes. The current account deficit will also decline but remain at high levels: 10.8 percent of GDP in 2006, 10.1 percent in 2007 and 9.7 percent in 2008. Total consumption will rise 4.7 percent in 2006, 4.1 percent in 2007 and 4.2 percent in 2008, while private consumption will rise at a nearly 3.5 percent pace, according to the report. The unemployment rate will reach 9.6 percent of the work force in 2006, 9.2 percent in 2007 and 8.8 percent in 2008. In its spring estimates, the OECD had said that the jobless rate would reach 9.7 percent in 2007. With Greece having achieved, for the first time, a budget deficit below 3 percent of its GDP, it is important, says the OECD, to set other goals, such as the achievement of permanent budget surpluses, the sharp reduction of the public debt and higher domestic production. The report warns that the reduction in income tax rates over a period of three years, while beneficial for low and middle incomes, may reduce revenue to the point where the 2008 budget deficit could exceed the 3 percent of GDP limit deemed acceptable by the EU.

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