Momentum requires reforms
Initial indications lend support to the forecast that the Greek economy will continue its strong performance for its 14th consecutive year, growing by more than 4 percent in 2007, the Foundation for Economic and Industrial Research (IOBE) said in its quarterly report yesterday. The report notes that growth is mainly driven by domestic demand, particularly private consumption, which, despite rising interest rates, is projected to stay strong. «Investment has recovered, along with a rapid rise in exports, which was marginally faster than the respective rise in imports.» IOBE considers that the economy’s strong performance in recent years is partly due to the economic policy the government has followed. However, despite the progress made, the economy continues to face serious challenges regarding its mid- to long-term prospects. These are the difference in inflation from the eurozone average, the still high unemployment, the continually growing current account deficit and impediments to entrepreneurial activity. According to the report, such problems are the symptoms of chronic structural, long-term weaknesses in the labor and products markets, as well as in the operation of the broader public sector which must addressed as soon as possible in order to secure the economy’s further growth prospects. «It is now imperative to promote effective structural policies that will deal with the chronic weaknesses, will limit existing impediments to entrepreneurship and will contribute to the reorientation of the Greek economy toward a mode of growth that will be based more on the production of internationally competitive products and services, and less on the dynamism of domestic demand, which is subject to the variable factors,» said IOBE. The report also recommends continuous efforts toward fiscal adjustment with a view of eliminating the deficit, as well as the adoption of policies targeting the creation of a more efficient state apparatus. IOBE warns about the adverse effects of political factors on the economy. «The current year is a pre-election, perhaps even an election year, which raises concern regarding the effect of the political cycle on the pace of the implementation of reforms, but particularly on planned public spending which may exceed budget targets.» Public spending rose faster than expected in the first quarter of 2007, increasing doubts that annual targets will be attained at a time when resistance to growing demand for handouts appears to be weakening, IOBE points out. Exports may have improved substantially in 2006 (with the trend continuing into 2007) and the cumulative increase in exports may have been faster than that of the nominal GDP, but the current account deficit remains at high levels, reflecting the country’s low international competitiveness. Regarding headline inflation, IOBE finds it is showing signs of slowing, due to softer oil price rises but that core inflation tends to accelerate. Conditions, mainly in the international environment, allow for a relative safe forecast that the general consumer price index will rise about 2.7 percent in 2007, while the EU-harmonized rate will end slightly lower than 3 percent, considerably higher than the eurozone average.
