Buoyant labor market, new fiscal measures and revived tourism should cushion the impact of inflation on private disposable income
CPI inflation accelerated further to 10.2% y-o-y in April, the highest pace on record since 1995, raising concerns of a larger-than-initially expected impact on the private sector’s disposable income.
▪ Further increases in energy and food prices and a strengthened transmission of rising input costs to other categories of goods and services are expected to push inflation to new highs of c. 12% in May-June.
▪ CPI inflation is projected to peak in Q2, slowing modestly in Q3, and decelerating at a faster pace from Q4:2022 onwards, when supportive base effects on energy prices will kick in. The average inflation for the FY:2022 is estimated at 8.5%.
▪ Encouraging trends in the Greek labor market both in terms of employment creation as well as regards wage developments, will help offset the rising toll on household disposable income.
▪ Labor Force Survey data for Q1:2022 revealed a stronger-than-expected momentum in employment creation, which is expected to gain additional traction in Q2, leading to an annual employment growth in FY:2022 of 4.5%. Strong tourism activity will keep up the hiring momentum in Q2 and Q3 giving rise to further upside risks.
▪ Higher minimum wage (+9.7% y-o-y), strengthened labor productivity and strong labor demand bode well for a broader adjustment in private sector wages in Greece, following a long period of restraint.▪ NBG estimates that the average wage in the private sector will increase by 2.5% and 1.5%, respectively, in 2022 and 2023 through the transmission of the minimum wage adjustment and supportive market conditions.
▪ Household mixed income – mostly reflecting proceeds from unincorporated business activity and rents – will increase by an average pace of 10% y-o-y in 2022 and 4.5% in 2023, typically showing a close correlation with inflation.
▪ Additional fiscal support to the private sector of about €5.5 bn (2.8% of GDP) has been activated to limit the impact of higher energy costs especially to low-income households and SMEs.
▪ All in all, the estimated combined support to households in 2022 from the labor market adjustment and new fiscal measures is estimated at 8.5-9.0% of their 2021 disposable income, broadly matching CPI inflation.
▪ The combined increase in business production costs in 2022 due to the deterioration in the terms of trade and higher wages is estimated in the vicinity of €8.5 bn (4.3% of GDP or around ¼ of thegross operating surplus of Greek corporate sector in 2021) and remains manageable in view of:
− The resilience of demand reflected in the buoyancy of business turnover data (up by €20.2 bn y-o-y and €16.8 bn above their pre-Covid levels in Q1:2022)
− Τhe strong start to the tourism season and increasingly encouraging signs for the coming months with an upside potential of €7 bn to reach 2019 outcomes
− The strong recovery in business profitability in 2021 to a 10-year high of €32.2 bn (+€8 bn y-o-y), combined with strong liquidity buffers (€42 bn in Q1:2022)
− Increased pricing power and additional fiscal support to firms
Buoyant labor market, new fiscal measures and revived tourism should cushion the impact of inflation on disposable income
Consumer prices in Greece remained on a steep upward trajectory with CPI inflation accelerating to 10.2% y-o-y in April, the highest pace on record since 1995, from 8.9% y-o-y in March 2022 (7.4%, on average, in Q1), putting additional pressure on private sector’s disposable income.
New increases in energy and food prices and a strengthened transmission of rising input costs to other categories of goods and services brought inflation to double digit levels in April. Specifically,
further increases in energy prices (including electricity) added 6.8 pps to the annual change in CPI in April from 5.1 pps, on average, in Q1:2022. The new surge in international energy prices, following the crisis in Ukraine, and the concomitant rise in electricity prices in the domestic wholesale market have passed to retail prices, offsetting the benefit from increased State subsidies of electricity costs and transportation fuels in the same month. Similarly, food and nonalcoholic beverage prices soared by 10.9% y-o-y – posting the sharpest increase since 2002, when domestic prices had adjusted to the euro changeover – as rising agricultural commodity prices and production costs continued to trickle down to consumer prices. It should be noted that prices in other categories of goods and services (except fuels, electricity, and food) grew by 3.7% y-o-y in April from 2.3% in Q1 2022, indicating a broadening of inflation pressures through second-round
effects.
CPI inflation is expected to peak in Q2 at about 12%, slowing down modestly in Q3 and decelerating at a faster pace from Q4:2022 onwards, when supportive base effects on energy prices will kick in. However, this slowing will be more gradual than previously thought due to the sizeable lagged effects from the new hikes in imported input costs and the expectation of higher energy prices in 2023-24 as the EU speeds up its energy transition strategy in the face of increasing geopolitical risks.
Indeed, market expectations of energy prices, for the rest of the year, increased significantly compared with the respective estimates made in March, as regards Brent prices (+15% to 115 USD/barrel), whereas forecasts of natural gas prices decreased slightly. Most notably, market forecasts of energy prices for 2023 and 2024 have been revised upwardsfor both commodities, compared with the respective March estimates, as a permanent restructuring of the energy market has started to be priced in. Specifically, latest forecasts (end of May) of Brent oil and natural gas prices, derived from futures contracts, increased for 2023 (by c. 12% to 100 USD/barrel, on average, for Brent and by 29% to nearly 81€/MWh for natural gas), whereas available information for 2024 and 2025 suggests that prices will decline modestly, remaining 14% above their 10-year average as regards to crude oil and 111% concerning natural gas.
On the same note, there are yet no signs of a slowdown in non-energy import and producer price inflation, which spiked to 7.2% and 9.6%, respectively, in March and April. These increases are expected to feed into consumer prices in the coming months, deferring the prospective significant inflation slowdown to the last months of the year, when base
effects will become more supportive. Demand factors could be starting to play an increasing role in inflation developments, with the output gap returning in 2022 to a broadly balanced position, for the first time since 2009. The speed of recovery in demand is becoming stronger in the services sector which lagged behind during the turnaround in the previous year. In particular, in tourism-related service activities the increased buoyancy of demand following the full lifting of Covid-19 restrictions along with higher production costs, put upward pressure on prices (average inflation in the category “transportation by air and sea” of 16.2% and in accommodation services of 15.7% y-o-y in April). Notably, average inflation in the broader “services” category remained rather subdued (+1.3% y-o-y in April and 0.7% in Q1:2022) due to the relative price stability in basic services that carry a high weight in consumer spending such as health, education, telecommunications and food services.
Nonetheless, resilient demand and increased input costs continue to push to all-time highs the perceived pricing power of firms in most of the business sectors, as indicated by further rises in selling price prospects in the latest EC business survey data for Greece. Buoyant labor market will play an important role in supporting household income
Encouraging trends in the Greek labor market both in terms of employment creation as well as regarding wage developments are expected to help offset the rising inflation toll on household disposable income. Greece’s labor market reacted strongly to the turnaround in economic activity in 2021 and has maintained its dynamism in the first
months of 2022. Employment rose by 1.3% y-o-y in FY:2021 (+4.5% y-o-y in H2:2021) and the unemployment rate fell to an 11½-year low of 12.8% in December 2021. In Q1:2022, employment growth spiked to 12.0% y-o-y (boosted by favorable base effects, a strong carryover from 2021 and rapid new job creation in the services sector), exceeding its pre-pandemic level in the same period in 2019 by 9.6% (or by 256K employees). Net hiring flows of wage earners (according to the Ergani Information System) increased further to 124K in April 2022 compared with 33K in April 2021 and are expected to pick up more steam in the coming months, as tourism activity inches closer to pre-pandemic levels.