Greek economy takes big hit due to coronavirus

Greek economy takes big hit due to coronavirus

Coronavirus is hampering the growth of the Greek economy, with the Greek Financial Council (GFC) estimating that the impact on the 2020 GDP could range from 0.3 to 0.7 points (compared to its initial forecast for expansion at a rate of 2.54% this year).

If the situation deteriorates dramatically, the Financial Council believes some budget “cushions” must be sought in the event that any extraordinary expenditure (for example in the health sector) comes up, such as possibly utilizing part of the cash buffers or a timely consultation with the institutions for an escape clause agreement.

It is imperative that a controlled deviation from the primary target of 3.5% of GDP does not lead to restrictive fiscal measures that will further aggravate the macroeconomic situation in Greece and hinder the positive dynamics of recent years.

A global issue

According to the GFC the spread of the SARS-CoV-2 virus (“coronavirus”) is now certain to trigger a revision of predictions of growth in the global economy for 2020. The outbreak in Europe will naturally slow the GDP growth in the eurozone area.

Based on this assumption, the GFC made estimates regarding the negative impact on the Greek GDP due to the growth slowdown in the euro countries.

“The estimate is that, for every percentage point of the forecast for GDP reduction in the euro area, Greek GDP decelerates by about 0.8%. In the exercise we used two very unfavorable scenarios, which under normal conditions, that is, based on historical prices and without “structural changes” in the economy of Greece and the eurozone, could cause a decline in the estimated growth for 2020 by 0.3 and 0.7 percentage units. That is, the estimation for the primary scenario of the model medium-term macroeconomic forecasts of the GFC for real GDP growth of 2.54% (baseline scenario) is reduced to 2.21% (scenario 1) and 1.88% (scenario 2). ‘

However, the Financial Council notes, “in the event of an epidemic, there will be a structural change” to the model, which is currently difficult to predict. In addition, the crisis may also affect the Greek economy endogenously on the basis of at least two channels:

Deterioration in the balance of goods and services due to the reduction in tourist revenues, as well as a plummet in maritime and land transport revenues, etc. Secondly, due to a negative impact on private consumption (catering, entertainment, construction, etc.).

Based on these negative estimates, it appears that we are likely to significantly drift away from the target of GDP growth of 2.8% in 2020, which will have a detrimental effect on budgetary outcomes. /ibna