Q1 data stir market worries over growth and debt sustainability

The first-quarter data present some very worrying signs for the Greek economy in 2019, clearly putting the attainment of the target of 2.3 percent growth at risk this year, analysts tell Kathimerini.

The meager 1.3 percent growth recorded on an annual basis in the January-March period illustrates that the economic expansion remained weak six months after the end of the bailout programs and at the lowest level of the last couple of years, also imperiling the long-term sustainability of the national debt.

“The quarterly GDP data in Greece tend to be volatile and subject to substantial revisions. Still, the Q1 numbers raise concerns and point to risks that the weak growth in the rest of the eurozone may have also started affecting Greece’s already weak recovery,” says Athanasios Vamvakidis, managing director and head of European G10 Foreign Exchange Strategy for Bank of America Merrill Lynch.

“If Greece cannot decouple from the weak eurozone economy, fiscal targets could be at risk, particularly following recent pre-election spending. Greece already has some fiscal buffers, which helps, but the advice to the Greek government would be to save it as more rainy days may be ahead,” he adds.

Fabio Balboni, senior European economist at HSBC, argues that “growth in Q1 has been disappointing, but looking at the detail there could be some temporary elements (sharp rise in imports and fall in government spending) which get unwound later in the year.”

“However, the ability for Greece to deliver growth of around (or in excess of) 2 percent in the next few years to us is key to reassure investors about the sustainability of its debt. The IMF debt sustainability threshold is only met, in the medium-term, if Greece delivers potential growth of around 1.5 percent. With lower growth, Greece might need further official debt restructuring measures in 10-15 years, which could create concerns in the markets about the possible inclusion of the private sector,” says Balboni.

“Lower growth in the near term could also push up the fiscal deficit (the rule of thumb is that a 0.2-percentage point reduction in growth increases the deficit by 0.1 percent of GDP). The fiscal deficit is the other key driver of debt sustainability. Our forecast is 2 percent, but weaker Q1 growth than we had expected puts some downside risks to the forecast, so as things stands the 2.3 percent targets seems very ambitious,” the HSBC analyst concludes.

Yvan Mamalet, senior European economist at Societe Generale Corporate & Investment Banking (SG CIB), comments that “The first quarter GDP growth was clearly disappointing, as after negative growth in the fourth quarter,  it remained muted on a quarterly basis (0.2 percent quarter-on-quarter). This put downward risks on the 2019 annual growth forecasts, as the carry-over (if growth remains constant in the rest of the year) is only 0.4 percent. As such, a strong rebound would be needed to reach the 2.3 percent target. Note, however, that the details of the first quarter GDP growth proved favorable, as private consumption recovered and investment grew by more than 8 percent over the quarter. Looking ahead, both consumption and investment should remain positively oriented as well as government expenditure, which was one of the main drag on growth last quarter.”

He further notes that “slower growth will indeed have negative repercussions on tax revenues and hence on the primary balance target. But, as highlighted by latest European Commission Enhanced Surveillance Report, the main risk comes from fiscal slippages and expansionary measures recently announced by the government.”

“That said, even if Greece misses its primary balance target this year, it shouldn’t be by a large margin, with likely no major consequences on debt sustainability.  However, a primary balance target miss as soon as 2019 would highlight the challenges Greece will face over the coming years, given the government commitment to a 3.5 percent of GDP primary target until 2022 and 2.2 percent on average until 2060, eventually putting additional and renewed concerns on Greek debt sustainability,” Mamalet tells Kathimerini.