BoG governor Stournaras: Greek economic recovery is continuing, growth is gathering pace

Greece’s economic recovery continues and growth is gathering pace after the completion of the country’s second program review, Bank of Greece Governor Yannis Stournaras said at an event organized by Credit Suisse on Wednesday.

“The economic recovery continues and growth is gathering pace following the completion of the second review and the positive impact it had on confidence and liquidity,” he said in his speech titled “Greece and the global economy: Prospects and main challenges ahead”.

Stournaras said the consolidation of growth is reflected not only in GDP figures, but also in the improvement in various short-term indicators: The real GDP increased at a faster rate in the second quarter, with exports of goods and services, government consumption and private consumption being the positive drivers of growth, while gross fixed capital formation declined, mainly due to the significant fall in disbursements from the Public Investment Program.

Industrial production performed exceptionally well in the first eight months of 2017, retail sales volume in the first seven months of 2017 increased and employment has been growing at healthy rates since mid-2014 despite the stagnation of economic activity, the central banker said.

The improved outlook for the economy and the completion of the second review contributed to the decline in Greek government bond yields to late-2009 levels and facilitated the return to international markets on July 25, he continued. Moreover, the slope of the yield curve steepened, implying improved investor perceptions for the outlook of the Greek economy. Corporate bond yields have also fallen to historically low levels. Finally, Fitch recently upgraded Greece’s credit rating on account of the sustained recovery and the decline in political risk.

He also highlighted the successive reductions in the ELA ceiling, the increase in deposits, FDI inflows and the rise of soft data indicators like the PMI and economic sentiment.
“Finally, there is progress in reforms despite the recurrent delays in program implementation,” he said.

According to a recent Lisbon Council report (EuroPlus Monitor, September 2017 Update), Greece is still ranked first among the 28 countries of the European Union on the basis of the Adjustment Progress Indicator. “This implies that Greece has put the worst of the first half of 2015 slippage behind it and has started to improve again,” he noted.

Discussing risks and challenged ahead for the economy, he said the most “significant and immediate” is a delay in the completion of the third review of the program.

“This should be avoided as it would fuel a new cycle of uncertainty that would lead to the suspension of investment plans, it would delay the repayment of government arrears and would not facilitate a normalization of financial conditions. In such a case economic recovery and the return to international financial markets will prove to be short-lived,” he noted.

Giving the central bank’s growth forecasts for 2017-2019, Stournaras said BoG estimates that GDP in 2017 will increase by approximately 1.7 percent. For 2018 and 2019, growth is projected to accelerate to 2.4 percent and 2.7 percent respectively.

Consumption is expected to rebound modestly, driven by robust employment which is recovering faster than output on account of the previously implemented labour market reforms and the active labour market programs in place. Investment is projected to increase as confidence is restored and financial conditions improve and exports are projected to continue their positive trend, benefiting not only from the benign global economic outlook but also past improvements in cost competitiveness.
“These projections are based on the assumption that the reform and privatization program will be implemented smoothly and according to the set timetable,” he said.

Commenting on the Greek banking system, the central banker said that the large volume of non-performing loans and the problem of strategic defaulters are preventing it from financing economic growth.

“All the necessary measures have now been legislated and the regulatory framework has been re-formulated in order to be able to address the NPL problem in an efficient and expeditious manner. Banks need to follow faithfully the targets agreed with supervisors. Particular emphasis should be placed on the restructuring of companies and the closure of non-viable businesses. This will release resources to support new and existing sound investment and business initiatives, thereby supporting the economic recovery,” he said.