COVID-19: A Type II shock for the Greek Economy

NO, we are not epidemiologists and, NO, the title of our presentation does not refer to a comment we want to make regarding infection rates, cure rates, curve flattening or any other statistic relevant to the spread of the disease among the Greek population.

Instead, (we claim that) we are economists and in that capacity have devised a number of scenarios (let me repeat: scenarios, NOT forecasts) regarding the macroeconomic outlook of the Greek economy. According to the baseline scenario, the Greek economy could contract by 8% this year and rebound by 7% in 2021 and 6.1% in 2022. Having discussed this scenario with many analysts both inside and outside Piraeus Bank, we have come to realize that our views receive a highly asymmetric reception. While nobody expresses any serious objections to the recessionary leg of our scenario, the recovery leg seems too optimistic to many. As you might expect, we disagree and raise a word of caution: going forward, rates of change will become next to meaningless; for example, in that context I can easily forecast that Greece’s growth rate in tourism revenues in April 2021 could easily exceed 3,600%.

To avoid confusion and allow for more clarity in our analysis, we should focus on absolute levels of economic activity rather than rates of change. There are two ways to do this. One is to compare levels vis-à-vis their equivalents in 2019. Going back to my tourism example, I have produced my ‘forecast’ assuming that in April 2021 tourist revenues will increase to €272 million vs. only €7 million in April 2020. Despite this phenomenal growth rate, the 2021 figure is exactly half the level of the April 2019 tourism revenues of €543 million. Now, which of these two statistics – the 3,600% growth rate or the fact that we will see only half the 2019 level of revenues – is more useful?

The second and perhaps more interesting way to compare levels is to compare our current scenario and the pre-COVID-19 forecast. Putting our baseline scenario of −8%, +7% and +6.1% into that context and comparing it with the December 2019 forecast, we conclude that, despite initial appearances, our scenario is so conservative that it implies a cumulative loss of income and growth to the tune of €75 billion over the 2020–2027 period.

In the typology of business cycles, our COVID-19 scenario represents a Type II shock, one in which GDP growth rates recover to their pre-shock trajectory but GDP levels remain permanently below their pre-shock path. (The other two types of shock are Type I, where both growth and absolute level trajectories return to their pre-shock paths, and Type III, where neither growth or level trajectories return to their pre-shock paths).

A final comment on our scenario: although we have focused our discussion so far on our baseline scenario, we have also produced – for risk management purposes – a stress scenario. Our philosophy in designing the stress scenario is informed by our experience of the Greek economy during the Great Recession of 2008 to 2016. What we learned during that period is that the true macroeconomic stress is not a function of the severity of a shock but of the duration of that shock. For this reason, our stress scenario assumes “only” a 10% contraction for 2020 (instead of opting for a larger shock of −13% or −15%), but that the contraction will last until Q1.2021, instead of Q3.2020 in the baseline, dropping 2021 GDP growth to −1.1%. In 2022 the economy rebounds to +7% growth, but we have already told you that growth rates can be misleading.