Specter of slower growth, inflation

The Greek economy is facing the serious prospect of a slowdown in its growth rate and a significant rise in inflation, requiring an intensification of efforts toward fiscal consolidation and an acceleration of reforms, the Foundation for Economic and Industrial Research (IOBE) said in its quarterly report yesterday. «If economic policy is compromised, under the pressure of current developments, it will most likely take an unpleasant turn, with unfavorable repercussions. In contrast, if it resolutely works toward the goals set and pursues the implementation of the structural changes announced, the resilience of the Greek economy in the face of the global crisis will be strengthened,» IOBE said. The employer-sponsored think tank says that given global developments, the projection of a 4 percent growth rate – on which the 2008 budget was based – now «appears highly optimistic.» «Taking into account the uncertainties, and developments in the second half of 2007, a projection of a GDP growth rate of 3.6-3.8 percent appears more realistic.» Regarding inflation, IOBE analysts maintain that the current circumstances are the least favorable in the last 10 years. Moreover, the gradual reduction expected later in the year is not likely to offset the steep increases of the first few months of the year and a figure of around 3.5 percent, instead of the 2.8 percent percent forecast by the government, now appears more likely, the report said. IOBE considers that given the unfavorable factors now in play, the attainment of the budget’s fiscal targets, particularly that of revenue, «is likely to require the adoption of additional measures in the course of the current year.» Nevertheless, even though IOBE recognizes the progress achieved in fiscal consolidation, it expresses reservations regarding its sustainability, as it is being pursued through an increase in revenues. «The fiscal consolidation of recent years has mainly resulted from an increase in revenues rather than a reduction in spending. This renders it fragile, as revenue depends on the fluctuations of the economic cycle,» says the report. Regarding the pension reform bill which is pending final approval by Parliament, IOBE considers it is in the right direction but would like to see even bolder changes in some parameters (for example retirement ages and the size of pensions). Finally, it expresses concern that the complexity of merging 131 social security funds into just 13 is likely to pose problems at the level of implementation and add red tape to the planned changes.