Week ahead & in review: Greece’s troubles continue, OECD forecasts revised upwards

Week in review: Alexis Tsipras, Greece’s prime minister, failed to convince the EU leaders meeting in Brussels this week to disburse a portion of the remaining €7.2bn of the bailout . Greece is becoming so short in funds that the Government is allegedly pushing to use cash from bank accounts of government agencies not dependent of the Central Government, such as the Social Security. The situation in Greece is rising fears of a bank run: last Wednesday, between €300 mn and €400 mn were pulled out by depositors, the largest amount since the February deal was reached. Greece’s initial reforms’ list penciled at the end of February was considered insufficient and Athens must now sign off on a final reforms’ list, get it approved and start implementing it, before the remaining cash is disbursed.

The OECD Interim Economic Assessment reported growth prospects slightly better than November’s forecasts. World output is now expected to grow 4% in 2015 (+0.1 pp than predicted in 2014), after 3.7% in 2014. A major positive contribution came from the 0.3 pp upward revision in the eurozone GDP to 1.4% in 2015 (after incipient 0.9% in 2014). Within the eurozone, the interim assessment only discloses new forecasts for Germany, France and Italy (all with upward revisions of 0.6, 0.3 and 0.4 pp to 1.7%, 1.1% and 0.6%, respectively). Oil and commodity exporters saw their growth prospects downgraded. These revisions are mainly influenced by the sharp fall in oil prices and the monetary easing. Lower oil prices may boost global demand and favor Central Bank’s to set low interest rates. At the same time, the environment of very low inflation and interest rates may cause some financial instability. The OECD assessment also alerts for the risk of countries relying only on monetary policy.

Inflation in the eurozone was was 0.3 pp above the -0.6%yoy in January, but remains in negative territory. One year ago, in Febraury 2014, inflation was 0.7%yoy. However, deflation is mainly caused by the shortfall in oil prices; inflation excluding energy and unprocessed food was 0.7%yoy in February, after 0.6%yoy in January.

This month’s concluding statement of the IMF mission to Lisbon recognises that the Portuguese economic adjustment programme was able to stabilize a severely unbalanced economy: namely, the highly deficient current account has turned into a surplus, the run-up in private and public debts has stopped and the country regained access to markets. Also, output began to expand during 2013 and the unemployment rate fell significantly from historical high levels.

The statement says policymakers still need to address several difficult legacies of the crisis and long-standing imbalances:

  • Portugal needs to generate jobs, namely amongst low-skilled workers since the current investment and growth perspectives are unlikely to fill the employment slack. Further active labor policies may partially overcome this problem, whilst Government may use effective tools to fight poverty.
  • Excessive debt in a large section of corporates needs be tackled; also, in respect to banks, the statement says they should take advantage of the current supportive economic and financial environment to tackle the corporate debt overhang more ambitiously. They should raise more capital, increase provisioning and accelerate the pace of write-offs. 
  • While public debt is still high (128.7% of GDP in 2014), fiscal consolidation needs to continue over the medium term, also to signal that past excesses won’t be repeated once current pressures alleviate. In particular, efficiency of wages and pension systems should be addressed. The statement says reforms of tax administration and healthcare have yielded tangible pay-offs, but ore needs to be done to increase tge responsiveness of public administration and the payment discipline of public sector entities. Product market reforms need to continue. The IMF recommends that structural reforms have to provide the main impetus to raise competitiveness.

Week ahead: 

  • Monday 23 March: Mario Draghi will talk in the EU Parliament
  • Tuesday 24 March: Flash composite PMI (Purchasing Market Indicator) for the eurozone is expected to rise slightly, signaling the better expectations for economic activity in 2015.