Greece Macro Outlook - September 2018

Greece's economic recovery on track against a more challenging international environment

Greece has successfully completed the 3rd Programme of financial support and has been granted a new set of public debt relief measures, which lower substantially Greece's medium-to-longer term servicing costs and maintain gross debt on a sustainable downward trend.

A framework of "Enhanced Surveillance" has been specified to ensure the continuity and completion of reforms as well as maintain the remarkable progress in fiscal consolidation.

Major rating agencies responded positively to the improving macroeconomic conditions, the decisions on the new debt relief measures and the accumulation of a sizeable cash buffer by the Greek State – which is estimated at €24bn – being sufficient to cover, if necessary, sovereign financing needs over at least a two-year period.

Economic activity in Greece is gaining traction, with GDP growth reaching 2.2% y-o-y in H1:2018 from 1.3% y-o-y in FY:2017, supported by exports and increasing confidence, with private consumption showing the first signs of responsiveness to improving macroeconomic conditions (1.0% y-o-y in Q2:2018, the first increase in 1-year).

Tourism arrivals increased by 19.1% y-o-y in H1:2018 and revenue by an outstanding 19.8% y-o-y in the same period, adding 0.9 pps to GDP growth in H1:2018, overperforming major competitors for a third consecutive year.

Greece's goods exports remained on an upward trend for a 9th consecutive year – a cumulative increase in export volume of almost 72% between Q4:2009 and Q2:2018 – reaching a historical high of 18.8% of GDP in Q2:2018 from 18.5% in Q1:2018 and a 20-year average of 11.2% of GDP.

Gross fixed capital formation (GFCF), excluding spending on transportation equipment, increased by 4.9% y-o-y in Q2:2018 from 9.1% y-o-y in Q1:2018. The decline in total GFCF by 5.4% y-o-y in Q2:2018 mainly reflects negative base effects from high ships orders in the same period in 2017 (contraction in investment on transportation equipment of -48.8% y-o-y in Q2:2018). The net impact on GDP growth from this decline is limited, as this investment category typically has a very high import content.  

GDP figures for the production and income sides of the economy point to a sustainable rebound in competitive business activity, reflected in the increasing value added of Greek production and the higher corporate profitability (annual increases of 2.3% y-o-y and 1.5% y-o-y, respectively, in H1:2018, according to national accounts data).

Forward-looking indicators presage a further improvement in activity in Q3:2018, when the main part of the direct and indirect support from tourism comes to the fore.

A back-loading of the public investment programme, along with positive confidence effects, should provide an additional boost to GDP growth in the H2:2018, offsetting the risks related to a slowdown in demand in major trade partners and increased turbulence in international financial markets (especially heightened exchange rate volatility in emerging markets).

Nonetheless, the recovery remains uneven, with a significant number of households and less competitive businesses still in a vulnerable position that will slowly improve as the recovery continues.

The fiscal outcome in 8M:2018 bodes well for an overperformance against fiscal targets for a 4th consecutive year and is expected to permit an effective loosening in fiscal conditions in H2:2018 and H1:2019.

Overall, the steady improvement in macroeconomic conditions and an ongoing reassessment of Greece's sovereign risk have set the stage for a revaluation of investment opportunities in the economy, with the upward trend in FDI flows already exemplifying the attractiveness of specific Greek assets.