Greek Macro Outlook: No “Scarring” & No “Hysteresis” – Only “Goldilocks”

Back in March 2020, at the onset of the global Covid-19 pandemic our major concern regarding Greece was linked to the long-run scars that this recession was going to inflict on the Greek economy. Our thinking at the time was that given Greece’s legacy issues such as high debt and high NPLs, limited credit growth and next to zero capacity for fiscal expansion, the impending recession was going to lead to a permanent and substantial loss of output.

Since then, a series of events such as the inclusion of the Greek bonds into ECB’s PEPP programme, the relaxation of Greece’s fiscal consolidation requirements and NextGen EU funding programme has lead us to revise our thesis.

First and foremost, we now have data points for the first nine months of 2020; hence, we are in a position to draw a much more accurate picture of the economic impact of the COVID-19 pandemic. That holds not only for GDP figures but also for unemployment, banking and real estate. We must also adjust for the substantial statistical revision of the GDP series covering the period 2010 –2020.

Furthermore, for our short-run outlook, we need to consider the impact of the second country-wide lockdown imposed in early November. Lastly, we have now incorporated the impact of the €32bn NextGenEU fund, which will double EU funding for Greece for 2021–2027, as well as the tailwind from improved fiscal space going forward. In practical terms, and looking at quarterly GDP figures, our outlook revision comprises a shift in the recovery expectations of the economy by one quarter, from Q1-2021 to Q2-2021. More importantly, we have shifted the long-run projections upwards by roughly 1.5%, to a long-term average of 3.5%.

Therefore, the positive long-run upgrade in our forecasts overwhelms all short-run fluctuations. As a result, our original fears about the long-run effects of the pandemic-driven recession were exaggerated. According to our projections, instead of “scarring” or “hysteresis” (which is fancy terminology employed by economists to say that a specific event, such as the COVID-19 pandemic, will have a long-lasting negative economic impact), Greece is entering a “Goldilocks” regime. Starting from extremely low levels of activity with extensive spare capacity and taking into account the newly established fiscal relaxation, abundance of liquidity, low funding cost and unprecedented levels of EU funding, Greece is in a position to not only recover pandemic-related lost output but also transition to a higher trajectory of economic growth relative to our pre-COVID-19 projections.