Athens News Agency: News in English, 06-11-06

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From: The Athens News Agency at <http://www.ana.gr/>

CONTENTS

[01] Greek deficit below 3% in 06-08, Commission

[01] Greek deficit below 3% in 06-08, Commission

It is the first time since 2004, when the European Commission initiated procedures on Greece's excessive fiscal deficit, that the EU's executive arm forecasts that Greek fiscal deficit will be below the Maastricht Treaty's 3.0 pct limit for at least two consecutive years.

The report, published in Brussels on Monday, forecasts that economic growth will remain strong at 3.8 pct of GDP in 2006 and 3.7 pct in 2007 and 2008, while the country's public debt will reach 104.8 pct of GDP this year, 101 pct in 2007 and 96.4 pct in 2008. Greece's public debt was 109.1 pct in 1992-2002, 107.8 pct in 2003, 108.5 pct in 2004 and 107.5 pct in 2005.

The Commission's report says:

After two years of strong economic activity, 2005 brought a slowdown of real GDP growth, to 3.6 pct. Although the planned fiscal consolidation and the petering out of the "Olympic bonus" have weighed on growth prospects, this outcome is slightly better than was expected last autumn. The economic slowdown originated in the deceleration of the domestic sector, while, after several years of negative contributions, net exports added to growth. In line with the less buoyant growth recorded in real disposable income, private consumption decelerated, while the strong fall recorded by public infrastructure expenditure in nominal terms led to a contraction of investment of about 1%. In spite of fiscal consolidation efforts, public consumption actually grew above 3.0 pct. The positive contribution of the external sector to growth does not reflect prosperous exports, but rather a contraction of imports. Exports of goods grew at about 8% and led to an almost 1 percentage point external sector contribution to growth, in spite of stagnation in exports of services, specially shipping.

Prospects for 2006 and 2007

While the Greek economy is projected to decelerate marginally over the forecast horizon, significant changes in growth composition are expected. In particular, economic activity will be almost exclusively demand-driven. GDP should grow at 3.5 pct in 2006. The combination of moderate wage and employment growth, leading to lower disposable income growth, and higher oil prices should slow down private consumption. However, consumption will still grow above income, gradually lowering the households' saving rate. Moreover, households' net borrowing saving rate. Moreover, households' net borrowing will rise, as housing investment is increasing. Total investment will rebound, thanks to the recovery of public infrastructure investment, while the new incentive laws, aiming at promoting investments, and the corporate tax reform should support private investment. Domestic demand is projected to contribute around 3.5 percentage points to growth in 2006 and 3.75 in 2007. The external sector is projected to be growth-neutral in 2006, while contributing negatively by the end of the forecast period. Imports are expected to return to growth rates of about 5%. Although projected to grow at around 7% over the forecast period, exports of goods are not expected to keep pace with world trade. However, after the strong correction last year, exports of services should return to growth rates much more in line with long-run trends over the forecasting period, and also helped by an upward trend in tourism. The external deficit is projected to fall by more than 1 percentage point, to below 6.5 pct of GDP by 2007.

Labour market, costs and prices

Consistent with decelerating but still robust GDP growth, employment is projected to grow above 1% per year until 2007. The unemployment rate should accordingly decrease by 1 percentage point to just below 10% by the end of the forecast period. Wages per head are set to rise more in 2006 and less in 2007 compared to last year. However, since productivity is expected to remain stable, wage moderation should not result in a significant deceleration of unit labour costs; rather, they should increase above the euro-area average. Such wage developments, coupled with sustained domestic demand and higher energy prices, should fuel inflation, which would remain above 3.25 pct over the forecast period. As a result, real unit labour costs should continue on an upward trend until 2007.

Public finances

The government deficit in 2005 was 4.5 pct of GDP. The 2006 deficit is projected to decline further to just below 3.0 pct of GDP. The forecast includes half of the 0.6 pct of GDP temporary one-off operations planned in the budget as a result of the need for clarification on the accounting treatment. However, the government has recently released a permanent measure amounting to 0.1 pct of GDP and a temporary measure amounting to 0.25 pct of GDP that are included in the forecast. In structural terms, the adjustment is expenditure-driven. Specifically, the measures to improve tax administration, coupled with the broadening of tax bases brought about by the fight against tax fraud and evasion, should raise revenues by less than 0.25 pct of GDP. In parallel, expenditure will fall by 0.75 pct of GDP, less that half of which is accounted for by the control of primary current spending. Overall, the structural deficit is projected to improve by around 1% of GDP in 2006. Assuming unchanged legislation, the deficit projection for 2007 will be around 3.5 pct of GDP which shows that structural measures will be necessary to keep the deficit below 3% in a durable manner. Finally, at 107.5 pct of GDP in 2005, the general government debt is projected to decrease only slightly by 2007.

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