OVERVIEW
Economic performance has continued to improve during the last year. Inflation came down significantly thanks mostly to the credible monetary and exchange rate policy. GDP growth was higher than in many EC partners (GDP 1997 estimated: 125.858 millions $ -GDP 1997 per capita estmated 11.900 $). Adherence to the 1994-99 Convergence Programme has helped establish credibility to the economic policy pursued. The government succeeded in bringing down the general government deficit to 7.6 per cent of GDP in 1996 and it is estimated to 4.2 per cent in the year ending. These achievements were due to the increase of the primary surplus as well as the reduction of interest payments, that followed the steady decrease of interest rates on government bills.
This development was halted temporarily, during the last two months, since the turmoil on the Asian financial markets has also spilled over, to a much lesser degree, to the Greek market. Since Greece is also an emerging market, it is very probable that (mostly) international investors apparently decided to reduce their exposure. As a result stocks, bonds and the currency came under strong pressure in the last week of October. The Bank of Greece intervened in the forex market to support the currency, thanks to the high currency reserves accumulated during the last two years, due to heavy inflows attracted by high returns and sound economic conditions.
The negative repercussions passed on to currently higher levels of interest rates, a development which is expected to be maintained for only a limited period. This estimation is based on the fact that economic performance is still favourable, with inflation coming down, and the confidence-building measures in support of the currency, such as the issuing of ECU convertible bonds, taken by the government.
THE CURRENT ECONOMIC SITUATION
During the last four years the Greek economy has shown significant signs of recovery, while the central goals of the revised Convergence Program as already mentioned, were mostly achieved. This progress in the macroeconomic indices was also evident during the current year and with only one-month to go, estimates can be made according to the latest available data:
Public Finances
For 1997, the central government deficit is estimated to fall to 6.2 per cent of GDP, with a primary surplus of 4.7 per cent of GDP. The general government deficit under the Maastricht definition is set to fall to 4.2 per cent of GDP. This improvement, which is more than 3 percentage points compared to last year, comes from the increase in the primary surplus to GDP ratio from 4.4 per cent in 1996 to 5.6 per cent in 1997, as well as from the reduction in interest payments as a percentage of GDP from 12 per cent in 1996 to 9.8 per cent in 1997. Tax revenues are estimated to increase by 13.6 per cent which is 3 percentage points higher than the rate of increase of nominal GDP, while current expenditures will rise by 4.5 per cent, six percentage points less than the GDP rate.
Although the debt to GDP ratio is not by any means the highest in the EU (Italy's and Belgium's debt are much higher), it remains well above the reference rate of 60 per cent of GDP. Athough it is not necessary for the criterion of 60 per cent to have been reached prior to participating in monetary union, the debt ratio must be seen to be declining steadily. Having peaked at 112.6 per cent of GDP in 1996, the ratio fell back to 109.9 per cent of GDP in 1997. Thus the debt to GDP ratio is now on a downward trend.
Price developments
Although Price developments during the first months of the year were unfavorably influenced by the increase in the price of food and fuels and the appreciation of the US dollar worldwide, the CPI continued its downward course. In October, the index rose by 4.7% in a 12 month change, from 8.0% in the corresponding period of 1996. Since, the underlying inflation rate is constantly on a falling trend in 1997, while the developments for wholesale prices for domestic consumption, remain quite satisfactory, CPI. The restrictive stance of income, fiscal, monetary and exchange rate policies contributed to this deceleration of inflation. As regards the rate of depreciation of the drachma against the ECU it is contained to 2.3% in the January - October period, while the corresponding depreciation of the nominal effective exchange rate is 1.8%.. Moreover, the unit labour cost is estimated to increase by 8.5% against 10.0% in 1996.
Economic activity
As it concerns the economic activity, for 1997, GDP growth is estimated to reach 3.5% supported by high private and public capital spending. One of the main suppporting factors for the acceleration of growth in 1997 is the significant decline in interest rates. Interest rates of newly issued treasury bills in September were 9.5% (due to the last turmoil on the financial markets, the rate was increased to 11.7% but it has already started dropping to 11,2% in November), from 11.2% in December 1996 and 20.3% in December 1993 .
The steady improvement of the macroeconomic environment has increased the confidence in the greek economy, as evidenced by the record high levels of the Athens stock exchange market in the current year (until August), as well as by the large capital inflows.
Employment / Unemployment
The expansion of economic activity in 1997 is estimated to produce a moderate improvement in the employment situation in Greece. Employment is expected to grow at a rate of 1.6 per cent in 1997, a rise which is sufficient to achieve a modest reduction in unemployment from 10.3% in 1996 to 10% in 1997.
THE 1998 FORECASTS
The review of economic developments in the previous year shows that the road leading to the final goals of economic policy, which are the convergency criteria, although still long appears now smoother. 1998 is considered the most crucial year since Greece is expected to meet the requirements for its entry to the EMU. The faster, than forecast, recovery of the Greek economy in the period 1994-1997 is expected to continue in 1998, as well. The rate of growth of GDP is expected to accelerate to 3.7 per cent. Furthermore, structural policies, already undertaken, in combination with the construction of large public works for the improvement of the economy's infrastructure, will open up positive prospects for renewed and enhanced economic growth.
Incomes policy will continue to be restrictive, in the sense that no wage increases will overrate inflation and productivity additively, in any sector of the economy, thus contributing to the faster deceleration of the unit labour cost, which is projected to increase by 4.6 per cent. Government announced that civil servant wage increases will be 2.5% in 1998.
As in previous years, the primary objective of Monetary policy will be to reduce inflation furthermore to reach the Maastricht target. The specific inflation target for 1998 (year-end) will be 2.5 per cent. In particular, as regards the exchange rate, the target is to keep the parity of the drachma against the ECU stable on average through the year.
The primary goal of the 1998 budget is to bring the general government deficit to GDP ratio down to 2.4 percent from 4.2 percent in 1997. This target will be achieved, on the one hand, through the curtailment of primary expenditures, strict incomes policy, the reduction of transfer payments and the restriction of new recruitments to the ratio of 1 to every 5 withdrawals. On the other hand by increasing revenues through the abolition of tax expenditures, by widening the taxable income basis, by taxing large property and interest earnings on government paper and by reforming the "objective criteria" for taxable income. The above measures are projected to increase the primary surplus to 6.4 per cent of GDP from 5.6 per cent in 1997. This policy will lead to a reduction in the ratio of public debt to GDP as most of the undertaking of the debt of the broader public sector by the government has been completed.
THE 1999 FORECASTS
For 1999 the economic policy framework will remain unchanged. This means that fiscal, monetary and incomes policies will remain restrictive, as they were the last years.
Our simulation scenarios show for 1999 a furher improvement in the main macroeconomic indicators. More specifically, the PSBR is forecast to decelerate to 2.1% of GDP, Inflation will be less than 2%, while the growth rate will be 4.1%.
| Basic Macroeconomic Aggregates |
| (% yearly changes) |
| Greece____________________________ | Convergence Programme___________ | Actual Data___ | Estimates | Forecasts |
| 1994 | 1995 | 1996 | 1997* | 1998* | 1999* | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | |
| 1. GDP | 1.1 | 1.2 | 1.7 | 3.5 | 3.7 | 4.1 | 1.7 | 1.8 | 2.6 | 3.5 | 3.7 | 4.1 |
| 2. Investment | 3.4 | 2.7 | 5.1 | 11.5 | 13 | 14.1 | -1.8 | 6.8 | 9.4 | 11.7 | 13.2 | 14.4 |
| 3. Inflation rate | 10.8 | 7.9 | 6.1 | 5.9 | 3.7 | 2.5 | 10.9 | 8.9 | 8.2 | 5.6 | 3.7 | 2.5 |
| 4. Unemployment rate | 10.1 | 10.4 | 10.2 | 10.1 | 9.7 | 9.3 | 9.6 | 10 | 10.3 | 10 | 9.7 | 9.2 |
| 5. Unit Labor Cost | 11.3 | 7.4 | 5.6 | 7.6 | 4.5 | 3 | 12.1 | 11.6 | 10 | 8.5 | 4.6 | 3 |
| 6. General Government Deflicit (as % of GDP) | 13.2 | 10.7 | 7.6 | 4.2 | 2.4 | 2.1 | 10.3 | 9.8 | 7.6 | 4.2 | 2.4 | 2.1 |
| 7. General Government Primary Surplus (as % of GDP) | 0.7 | 2.9 | 4.3 | 6.2 | 6.9 | 6.6 | 3.9 | 3.3 | 4.4 | 5.6 | 6.4 | 6.1 |
| 8. General Government Gross Dept (as % of GDP) | 112.1 | 115.2 | 115.3 | 109 | 107 | 101 | 109.6 | 111.3 | 112.6 | 109.9 | 107 | 101 |
| 9. Average Depreciation | 7.5 | 3 | 1 | 0 | 0 | 0 | 7.1 | 3.5 | 1.1 | 1.7 | 0 | 0 |
| 10. Average interest rate of Treasury Bills | 18.5 | 14.1 | 10.6 | 9.8 | 7.7 | 6.5 | 19 | 15.5 | 12.9 | 10.2 | 8.9 |
Source: 1994-96:NSSG, 1997-98: Estimates and Forecasts of the Directorate of Macroeconomic Analysis
(*) According to the Updating Convergence Programme for the period 1997-99
| E.U. -15________________________________ | Actual Data__ | Estimates | Forecasts |
| 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | |
| 1. GDP | 2.9 | 2.4 | 1.8 | 2.6 | 3 | 3.1 |
| 2. Inflation rate | 3.3 | 3 | 2.5 | 2 | 2.2 | 2.1 |
| 3. Long Term Interest Rate | 8.3 | 8.3 | 7.1 | 6.2 | 6.1 | 6.2 |
| 4. General Government Deflicit (% of GDP) | 5.5 | 5.1 | 4.3 | 2.7 | 2.2 | 1.8 |
| 5. General Government Gross Dept (as % of GDP) | 67.9 | 71 | 73 | 72.4 | 71.5 | 69.9 |
| 6. Unemployment rate | 11.3 | 10.8 | 10.9 | 10.7 | 10.3 | 9.7 |
| 7. Unit Labor Cost | 0.1 | 1.3 | 1.9 | 1.1 | 1 | 1.6 |