BoE: Growth of 2.3% in 2024 and further acceleration to 2.5% in 2025

The Interim Report of the Bank of Greece on Monetary Policy 2024 was submitted today to the Speaker of the Greek Parliament and the Council of Ministers.

As stated in the Bank of Greece’s Report, Greek GDP growth is expected to reach 2.3% in 2024, accelerate to 2.5% in 2025, and decline slightly to 2.3% in 2026 and 2.0% in 2027. For inflation, it forecasts that based on the Harmonised Index of Consumer Prices (HICP), it is expected to be 3.0% in 2024, down from 4.2% in 2023, reflecting the sharp slowdown in food inflation.

Finally, referring to the international level, the BoE estimates that although the global economy remained resilient in 2024, uncertainty about its future has increased significantly. Also, the outlook for global and European GDP remains positive.

Positive economic developments in an international environment of heightened uncertainty

The global economy remained resilient in 2024, despite restrictive monetary policy and uncertainty from ongoing conflicts in Ukraine and the Middle East. Headline inflation continued to decline significantly in advanced economies, also due to the restrictive monetary policy in place. However, services inflation remains high and hence the process of lowering key interest rates, which was initiated in 2024 by monetary authorities in many economies, is proceeding with cautious steps. In any case, however, global financial conditions are currently more favourable than twelve months ago, global trade has recovered and international commodity and energy prices have broadly stabilised. However uncertainty about the future of the global economy has increased significantly.

Regarding the euro area, although economic sentiment indicators suggest that economic activity has been marginally weaker than expected, the economy is recovering and will strengthen over time as rising real incomes allow households to consume more and as investment is expected to recover. The gradual removal of restrictive monetary policy is expected to support consumption and investment.

During 2024, headline inflation in the euro area continued the downward path that had begun in 2023, with most long-term inflation expectation indicators standing at around 2%. As a result, the Governing Council of the European Central Bank (ECB) in June, September, October, and December cut, by 25 basis points each time, the interest rate of the deposit facility. The Governing Council has made it clear that it is not committed to the future path of policy rates.

The outlook for global and European GDP remains positive, but the risks surrounding the outlook are heightened due to heightened geopolitical uncertainty and the potential strengthening of trade protectionism. For the euro area, additional uncertainty is created by recent political developments in major European economies.

Real economy: Maintaining growth momentum – Slow deceleration of inflation

Economic activity in Greece continued to grow at a satisfactory pace in the first nine months of 2024 (2.3% compared to the same period in 2023). The main component of growth was domestic demand, mainly coming from private consumption, but also from investment. The rise in consumption was supported by rising household incomes, as employment continued to move upwards and nominal wages increased significantly. Exports of services also moved positively. However, the net contribution of the external sector was marginally negative, as exports of goods are estimated to have been affected by sluggish external demand, while imports of goods and services recorded a significant increase. Finally, the decline in public consumption contributed negatively to the GDP formation.

Harmonized inflation in 2024 decelerated compared to 2023. In particular, in the available eleven months of 2024, it averaged 3.0%, down from 4.2% in 2023. In terms of its components, there is a clear deceleration in food and non-energy industrial goods inflation in 2024 compared to 2023. The persistence of services inflation has been a substantial obstacle to a faster deceleration of headline inflation, which as a result has been set at higher levels compared to the euro area.

Financial developments: More favourable financial conditions

Investor expectations for inflation in the euro area and the US have moved downwards and are converging towards the respective targets of the ECB and the US Federal Reserve. In particular, investors have, as early as the end of Q3 2023, formed expectations for interest rate cuts by major central banks globally. As a result, financial conditions internationally are currently more favourable than twelve months ago. In this context, government and corporate bond yields have declined, more so for shorter-dated bonds, contributing to the significant improvement in financial conditions internationally. However, financial conditions may be adversely affected by heightened international geopolitical and macroeconomic uncertainty.

Greek government bond yields have largely followed developments in the yields of other euro-area government bonds. At the same time, credit rating upgrades for the Greek economy have led to significantly increased investor participation in new Greek government bond issues, resulting in a continued decline in the cost of Greek government borrowing.

During 2024, upgrades of Greek banks’ credit ratings were observed. This leads to a reduction in the cost of borrowing of Greek banks from the international capital markets and thus contributes positively to their net interest income. Similarly, yields on non-financial corporate (NFC) bonds have been declining since the beginning of 2024.

Stock prices on the Athens Stock Exchange (ASX) rose strongly until the end of October. Bank shares outperformed the general index of the CSE, mainly in line with the upgrade of Greece’s sovereign credit rating to investment grade, increased profitability and upgrades of the banks’ own credit ratings.

Banking sector: Increase in deposits, the decline in lending rates, and increase in lending

Increase in bank lending, increase in lending, and loan growth.
Time deposit rates, after having followed an upward trend for about a year, remained almost unchanged in Q2 2023 and the first ten months of 2024 in most categories, despite the reductions in Eurosystem policy rates that took place. It is estimated that credit institutions, in order to limit the outflows of savings from term accounts to alternative placements, are postponing the adjustment of the interest rates they offer to depositors.

In the first ten months of 2024, the balance of private sector deposits recorded a cumulative increase of EUR 0.7 billion, driven by a recovery in business deposits, while the rise in household deposits was more limited. As a result, the balance of private deposits stood at EUR 195.5 billion in October 2024.

Bank borrowing costs for firms and households have declined this year, in line with the reduction in Eurosystem policy rates and the observed deceleration in banks’ funding costs from capital and bond markets.

The annual rate of change in bank loans to MFIs in the ten months of January-October 2024 strengthened and averaged 8.5%, compared to an average of 6.5% in 2023. The acceleration in credit expansion to firms is associated with a stronger demand for bank loans, particularly from large firms. The provision of business credit was supported by the co-financing and guarantee programmes of development agencies, as well as bank loans co-financing investment projects included in the Recovery and Resilience Facility (RRF).

The average annual rate of change in bank loans to households became less negative in the first ten months of 2024 (-1.1%) compared to the average in 2023 (-2.4%). This development was due on the one hand to mortgage loans, which recorded a milder rate of contraction, and on the other hand to consumer credit, whose rate of change was positive and continued to accelerate.

Banking system: Improvement in fundamentals

Bank fundamentals improved further in the nine months to 2024. In particular, liquidity and capital adequacy ratios and the quality of the loan portfolio improved, while the profitability of banking groups remained satisfactory. This was driven, inter alia, by the good performance of the Greek economy and the upgrade of Greece’s sovereign credit rating to an investment grade in 2023. As a result, rating agencies have recently upgraded major banks, keeping the outlook positive.

The non-performing loan (NPL) ratio on an individual basis declined significantly in September 2024 compared to December 2023 and reached its lowest level since Greece’s accession to the euro area. This development is due to the actions taken to consolidate the loan portfolio of some banks in the context of the upcoming inclusion of NPL securitizations in the Hercules state guarantee program.

Forecasts

According to the Bank of Greece’s current forecasts, GDP growth is expected to reach 2.3% in 2024, accelerate to 2.5% in 2025 and decline slightly to 2.3% in 2026 and 2.0% in 2027. The main component of economic growth is estimated to be consumption, while investment and exports will continue to make a positive contribution. Overall, the net contribution of the external sector to GDP will be slightly negative in the coming years, as strong investment activity and stronger consumption are expected to cause imports to increase at a pace similar to that of exports.

Inflation, based on the Harmonised Index of Consumer Prices (HICP), is expected to be 3.0% in 2024, down from 4.2% in 2023, reflecting the sharp slowdown in food inflation. By 2026, inflation will converge towards the ECB’s target (2%) but remain slightly above it. Services inflation is expected to be more persistent than inflation in the other HICP components, mainly reflecting expected increases in labour wages. Finally, core inflation is expected to fall significantly to 3.5% in 2024 and 3.1% in 2025, reflecting the deceleration of mainly non-energy industrial goods inflation.

Risks and uncertainties

The risks surrounding the Bank of Greece’s macroeconomic growth projections are mainly downside risks associated with: (a) any deterioration of the geopolitical crisis in Ukraine and the Middle East and its impact on the international economic environment; (b) the strengthening of trade protectionism internationally; (c) lower than expected rate of absorption and utilization of RRF funds; (d) intensifying labor market tightness and potential wage pressures; (e) slower than expected implementation of necessary reforms; and (f) potential natural disasters due to the climate crisis.

Progress

The Greek economy has achieved remarkable successes in recent years and has proven to be highly resilient to various external shocks, such as the pandemic COVID-19, the energy crisis and the war in Ukraine, and the subsequent rise in inflation. The growth rate of the Greek economy is higher than the EU average from 2019 onwards, resulting in an acceleration of the real convergence of GDP per capita with the European average. Employment is growing and the unemployment rate has fallen to single-digit levels despite a very significant increase in the minimum wage. As a consequence, disposable income is rising and the share of the population at risk of poverty and social exclusion has fallen between 2019 and 2023. The prudent fiscal policy pursued in recent years and efforts to fight tax evasion are paying off, as high primary surpluses are achieved without the need for restrictive measures and public debt as a share of GDP is decelerating.

The positive performance of the economy in recent years has resulted in the upgrade of the Greek government’s credit rating to investment grade. The confirmation of the progress that has been made is reflected in the recent upgrade of the Greek government bond rating to BBB from BBB- by Scope Ratings.

Challenges

The successes recorded in recent years are an indication that the economy is on the right track. However, the economic recovery effort from the decade-long debt crisis is not complete. In real terms, both GDP and GDP per capita are still below pre-crisis levels and convergence with the European average requires even stronger growth rates.

In addition, several domestic structural weaknesses, some of which predate the debt crisis, remain. For example, the lack of competition in several sectors of the economy, which exacerbates the international problem of price stability, high public debt, a large investment gap, low savings, low structural competitiveness that worsens the current account balance, low labour force participation of women and youth, and an ageing population, which exacerbate the tightness of the labour market over time, are factors that limit the growth potential of the economy.

These domestic weaknesses are compounded by global challenges, such as the intensification of geopolitical conflicts, geo-economic fragmentation and the resurgence of the trend towards trade protectionism, the climate crisis, energy security, the transition to a sustainable and circular economy, and the onslaught of new digital technologies, in particular artificial intelligence.

Policy proposals

Given the above, economic policy should remain focused on preserving fiscal credibility and stability and on implementing the necessary investments and reforms envisaged in the National Recovery and Resilience Plan “Greece 2.0”, which will facilitate the green and digital transition of the economy and accelerate the pace of growth in the coming years. At the same time, this will ensure the gradual improvement of the credit rating of the Greek economy.

However, while the timely absorption and effective use of RRF resources is crucial for the economy’s performance in the coming years, it is not sufficient to make up for the lost ground of the 10-year debt crisis. Therefore, additional actions are needed to address the inherent weaknesses of the Greek economy and to achieve sustainable economic growth.

Indicatively, demographic aging is expected to shrink the share of the working-age population. This requires the adoption of active policies and labour market education and training programmes aimed at increasing the participation of women and young people in the labour force. At the same time, however, targeted policies regarding the integration of migrants and the attraction of foreign workers are also required to address the already observed labour shortages in the agricultural sector and in sectors related to tourism and construction.

Given the constraints imposed by demographic developments, an increase in labour productivity is needed to maintain growth momentum. Increased investment is a key factor in boosting labour productivity. This requires the full absorption and productive use of available European resources. At the same time, it also requires strengthening the banking sector so that it can meet existing challenges and effectively finance investment and economic growth. Therefore, vigilance is needed to achieve further consolidation of banks’ assets and to avoid new net inflows of non-performing loans. In the same context, it is particularly important to diversify funding sources by expanding microcredit and access to alternative forms of financing through capital markets to meet the investment needs of SMEs, especially start-ups and innovators, who do not have collateral to obtain bank loans.

In view of environmental challenges and climate change, it becomes particularly important to improve the overall productivity of the factors of production, as it allows maintaining or increasing the standard of living while protecting natural resources and the environment.

To enhance the overall productivity of the economy, it is necessary to improve education and training, especially in new technologies, to increase human capital. In addition, labour and capital markets should operate in such a way that the most productive firms in each sector can attract most of the labour and capital. This process ensures that the best firms thrive while the least efficient ones exit the market. This is the so-called ‘distributive efficiency’, which implies an increase in overall productivity and economic progress. Conversely, if labour and capital remain in relatively unproductive firms, the economy and productivity gradually decline. This can occur if, for example, the labour market is characterised by excessive regulation, if unviable firms continue to operate thanks to favourable regulations or barriers to entry for new firms, or if new more dynamic firms have difficulty accessing finance.

Addressing other issues that impede the efficient allocation of resources is also vital for long-term growth. Such issues include polygamy and maladministration, delays in the administration of justice, an unclear spatial framework, poor linkages between education and the labour market, infrastructure deficiencies, high electricity costs, a high tax burden on labour income, and increased indirect taxes.

In addition, there is a need to strengthen the extroversion of the economy, as access to the global market gives firms the opportunity to exploit economies of scale and enhance their technological content, while international competition tends to reward the most productive firms.

However, in addition to the above, the improvement in overall productivity comes from increased productivity achieved at the firm level through the adoption of better technology, improved management practices, and innovative processes. Therefore, firms that adopt cutting-edge technologies and attract top talent can significantly improve their productivity. However, in addition to the actions of the firms concerned, government intervention through subsidies and tax incentives is needed to encourage the creation of an innovation ecosystem with partnerships between firms, research institutions and universities to promote basic research and its commercialisation.

***

In conclusion, raising overall productivity through reforms and innovation, together with increasing investment and labour force participation rates, is crucial to boosting economic growth and improving living standards. However, despite our commitment as a country to implement the necessary reforms, the response to new global trends and challenges cannot come from each country in isolation. Instead, a common approach, synergy and cooperation at the European level are needed, based on the proposals of the recent Letta report on the need to complete the Single Market and the Draghi report on the future of European competitiveness. A key prerequisite for addressing the innovation, productivity and competitiveness gap and ensuring Europe’s sovereignty, security and resilience is coordination and joint action by European partners, building also on the successful experience of the European recovery instrument NextGenerationEU.

The post BoE: Growth of 2.3% in 2024 and further acceleration to 2.5% in 2025 appeared first on ProtoThema English.