What 2023 holds for the Greek economy
With elections looming, the war in Ukraine escalating and the World Bank issuing their global economy outlook, i thought it would be interesting to delve into the current state of the Greek economy and the challenges it is facing. Once the butt of jokes across the EU. Greece has shown signs of reform. But with change incoming we’ll examine the political landscape and how it’s impacting the economy, including rising inflation and increasing costs of energy and food. We’ll also look at the impact of the ongoing war in Ukraine on Greece’s economy, as well as the effects of currency fluctuations on imports such as oil and gas. Additionally, we’ll explore what the future holds for Greece’s economy going into 2023 and its potential impact on the global economy.
Greece is a country located in the eastern Mediterranean, with a total area of 131,960 km² (50,950 mi²) and a total coastline of 13,676 km (8,497.9 mi). Greece is one of the largest countries in Europe and the 97th largest in the world.
The population of Greece has been steadily increasing over the past 30 years. From 1960 to 2021, the population of Greece has increased from 8.33 million to 10.64 million people, representing a growth rate of 27.7 percent. Currently, roughly 63.3% of the population is of working age, between the ages of 15 and 64.
Greece has a variety of natural resources, including bauxite, lignite, magnesite, petroleum, marble, and hydropower. Greece is a net importer of oil and gas, but exports food and tobacco products, manufactured goods, and mining products. Greece is a developed country, and compared to other European countries, it has a relatively low cost of labour.
The main industries in Greece are tourism, food and tobacco processing, textiles, chemicals, metal products, mining, and petroleum. Tourism is the primary industry in Greece, employing 17.5% of the population and contributing 18.6% to the GDP. Agriculture also plays an important role in the economy, employing 11.8% of the population and contributing 4.7% to the GDP.
Economy
Greece is a country located in the southeastern part of Europe, bordering Albania, Bulgaria, North Macedonia and Turkey. It is a net importer with a balance of trade deficit of $3.75 billion in November 2022. This has been the case since 1995 when the first records were kept. Greece’s main exports are petroleum products, aluminium, medicament, fruits and nuts, fresh or dried, vegetables prepared or preserved and fish, fresh or frozen. The top imports of Greece are crude petroleum, refined petroleum, packaged medicaments, nitrogen heterocyclic compounds and cars, importing mostly from Germany, China, Italy, Netherlands and France.
Greece has an average labour cost of €14.5 ($17.8) per hour, which is well below the EU average of €35.2 ($43). This makes it attractive to foreign investors and businesses looking to outsource certain services. Unit labour costs are defined as the average cost of labour per unit of output produced, and in Greece they decreased to 85.49 points in the third quarter of 2022 from 91.41 points in the second quarter of 2022.
The country has been receiving foreign aid or investment, mainly from the European Union, which has had a positive effect on their economy. This aid has played an important role in Greece’s economic recovery and long-term growth. The country has also recently increased its electricity exports to neighbouring Balkan countries due to the lower price of energy in Greece.
Overall, Greek exports and imports have been steadily increasing, indicating a steady improvement in the country’s economic situation. In 2022, the total of the foreign trade of goods transactions (imports + exports) of Greece amounted to €8.4 billion. Having a low labour cost and attracting foreign investment, in addition to receiving aid from the EU, has helped Greece to become more competitive in the global market and made it an attractive destination for businesses.
Inflation
Inflation in Greece has been a major issue in the country over the past several years. According to data from the Hellenic Statistical Authority, the overall rate of inflation in Greece rose from 1.22 percent in 2021 to 8.5 percent by December 2022. This increase was mainly due to rising prices for food and nonalcoholic beverages, household equipment, recreation, and culture. In October 2022, the inflation rate was 14.8 percent compared to the same month in the previous year.
Food inflation in Greece has been particularly high. In November 2022, the rate of inflation for food was 15 percent. This is significantly higher than the overall rate of inflation, which was 8.5 percent for the same period. The cost of fats and oils, cereals and bakery products, and other food items is predicted to increase up to 40 percent in 2023 compared to 2022 which saw prices increase 44.8 percent. The high food inflation has had a significant impact on the people of Greece, as it has pushed up the cost of living.
In comparison to the US and the EU, Greece’s current rate of inflation is higher. In the US, the Consumer Price Index (CPI) decreased by 0.1 percent in December on a seasonally adjusted basis, after increasing 0.1 percent in November. Over the last 12 months, the all items index increased 6.5 percent before seasonal adjustment. Meanwhile, Euro area annual inflation is expected to be 9.2 percent in December 2022, down from 10.1 percent in November 2022.
Currency
The Euro, the official currency of the European Union, has seen its value fluctuate over the past 12 months. In comparison to the US dollar, the Euro has generally been weaker. As of January 2023, the exchange rate is around 1.2 USD to 1 EUR. However, over the past 12 months, the Euro has seen some depreciation against the US dollar.
The financial crisis in Greece has caused the country to experience a significant drop in GDP per capita, falling to just above 70% of the EU average. This is mainly due to the fact that, as a member of the Eurozone, the Greek government has lost the ability to devalue its own currency. This has led to a widening competitiveness gap between Greece and countries such as Germany, making German goods and services relatively cheaper than those in Greece.
The Euro as a whole has been impacted by a number of factors in recent years, including the ongoing conflict in Ukraine and the cost of commodities being priced in dollars. The uncertainty and instability caused by the war in Ukraine has led to a decrease in investment in the region, which in turn has weakened the Euro. Additionally, the fact that many commodities, such as oil and gold, are priced in dollars has also had an impact on the currency, as a stronger dollar can make these commodities more expensive for Euro-denominated buyers.
Currency reserves
Greece has struggled with its currency reserves in recent years. The country has been under significant financial pressure due to a combination of factors, including high levels of government spending and a struggling economy.
Over the past 12 months, the Greek government has spent a significant amount of its currency reserves in an attempt to stabilise the economy. This has been done primarily through implementing austerity measures, such as cutting public spending and raising taxes. Despite these efforts, the country’s currency reserves have continued to decline.
The decline in currency reserves has led to concerns about Greece’s ability to meet its financial obligations in the near future. The government has stated that it will offset this decline by raising taxes in the future, but it is uncertain whether this will be enough to balance the books.
Government debt
Greece has long been struggling with its public debt, which stands at about 393 billion dollars in September 2022 and accounts for 193% of the country’s Gross Domestic Product (GDP). This is quite a high ratio, as the average public debt to GDP ratio in the European Union (EU) is only around 73.5%.
Greece recently paid off its last tranche of debt to the International Monetary Fund (IMF) in March 2022. The €1.85bn payment was made two years ahead of schedule. While the last official round of financial bailout support was made to Greece in 2018, the country still has until the year 2060 to fully pay off those debts.
Currently, the country is not taking on any new loans, while the loans they have taken are mainly from Germany. Greece has also taken loans from Britain, the IMF and the Marshall Plan, among others. The total number of loans taken so far is 13 and the value is estimated to be around 1.05 billion US dollars.
To try and tackle the issue of public debt, Greece is trying to make reforms in order to reduce the debt burden. Despite the current situation, the country’s public debt to GDP ratio is expected to trend around 185.00 percent of GDP in 2023 and 180.00 percent of GDP in 2024.
Political climate
The political climate in Greece is currently in a state of flux. The Parliament will vote on the 2023 state budget, which includes a cash reserve of 1.0 billion euros to subsidise electricity bills in the coming year. This comes as the country is transitioning out of the austere fiscal supervision that began in 2010 with the first programme of economic adjustment. The outcome of this vote may have significant implications for the political landscape of the country.
In addition, the upcoming elections due in 2023 will be held in a politically charged atmosphere due to the ongoing “Greek Watergate” scandal. Most polls indicate that the conservative New Democracy government will win the elections, although a second round may be necessary to form a majority government. With regards to coalition building, Syriza has ruled it out while Pasok has yet to take a clear position. It is unclear as to whether or not New Democracy will find a partner to form a coalition.
Ukraine war and Greece
Russia’s invasion of Ukraine has a tremendous impact on Greece, both economically and socially. Greek households are being hit hard by the sharp rise in energy costs, decreased tourist arrivals and borrowing from international markets. The rapid increase in energy costs, coupled with the decrease in tourism and investment due to the conflict, has posed a great challenge to the Greek economy.
The war in Ukraine is having a direct effect on Greece’s energy supply and costs, compressing spending and delaying investments. The conflict has also had an indirect effect on the country’s economy, as it has affected the supply chain, increased financial strains, and reduced consumer and business confidence. This has led to a slowdown in the euro area’s growth, which is Greece’s main economic partner.
Moreover, the Ukrainian conflict has greatly impacted Greece’s imports and exports. Greek companies that import grains from the two countries, mainly flour, are facing a major problem as Russia and Ukraine are considered the “granary of Europe”. Greek companies that export furs, fruits, vegetables, fresh goods, and specialised technology systems to Russia and Ukraine have been particularly hard hit by the crisis between the two countries.
The war in Ukraine is also having a major impact on tourism for Greece. Tourism revenues from Russia estimated at € 433 million last year will most likely be significantly reduced. In addition, lending rates are prohibitive at the moment and Greece is forced to wait for the interest rate for the 10-year bond to be in the range of 2.5–2.7 percent.
Moreover, inflation in Greece and Europe as a whole due to the war in Ukraine is reducing households’ disposable income, which will have a further negative impact on tourism this summer.
In 2023, the full impact of Russia’s invasion of Ukraine on Greece’s economy is yet to be seen. Experts are predicting that the blow will be comparatively greater for Northern Greece’s tourist destinations, while the country’s imports and exports sector may not be as hard hit. However, it is clear that the situation will remain unpredictable until the duration and outcome of the war become clearer.
2023
The Greek economy is expected to remain robust in 2023, despite a projected slowdown in growth from 6.7% in 2022 to 1.8%. This modest growth will be driven by investments, exports and fiscal support measures. Inflation is forecast to slow to 5%, allowing for some relief for households and businesses. The European Commission predicts that the Greek GDP will rise 1 % in 2023, with the primary fiscal surplus estimated to reach 0.7% of GDP. A reduction in the debt-to-GDP ratio is also expected, which could potentially lead to an upgrade in Greece’s investment grade status.
However, high inflation and interest rate hikes by the European Central Bank are expected to negatively affect both consumption and investments. Despite this, tourism is expected to remain robust, as the sector is likely to continue to record gains from high-income source countries. The energy crisis and the resulting increase in demand have created challenges to the supply chain, and caused price increases in almost all sectors. Moreover, the possibility of recession looms in Europe, with the Eurozone economy projected to only narrowly escape recession in 2023.
Clearly, there are major challenges to the Greek economy in 2023, but with the right policies, positive economic growth can be achieved. To do so, authorities must ensure that investments, exports and fiscal support measures continue to drive growth, while at the same time mitigating the risks associated with inflation and interest rate hikes.
