ATHENS — The Greek economy is expected to contract by 4.4 pct to 9.4 pct this year, the Bank of Greece said in its Monetary Policy Report submitted to the Parliament on Monday.

The report envisaged three scenarios for the development of economic activity in the country> under the baseline scenario, economic activity is expected to fall significantly in 2020, with the country’s GDP shrinking by 5.8 pct, recovering with a 5.6 pct growth rate in 2021 and a 3.7 pct growth rate in 2022.

The report said that the conditions shaped by the pandemic and the upending of the international environment, macroeconomic projections are subject to high uncertainty. This is why the Bank of Greece has, in addition to its baseline scenario, also considered two alternative scenarios, one milder and one more adverse. According to the Bank of Greece baseline scenario, economic activity in 2020 is expected to contract substantially, by 5.8% and to recover in 2021, posting a growth rate of 5.6%, while in 2022 growth will be 3.7%. According to the mild scenario, which assumes a shorter period of transition to normality, GDP is projected to decline by 4.4% in 2020 and to increase by 5.8% and 3.8%, respectively, in 2021 and 2022. The adverse scenario, associated with a possible second wave of COVID-19, assumes a more severe and protracted impact of the pandemic and a slower recovery, with GDP falling by 9.4% in 2020, before rebounding to 5.7% in 2021 and 4.5% in 2022.

Private consumption, in the baseline scenario, is expected to decline in 2020 due to a rise in the unemployment rate and a deterioration of real disposable income. In the medium term, and as labor market conditions improve, private consumption would contribute positively to economic activity. Investment is expected to be negatively affected by the pandemic, the surge in uncertainty and the temporary postponement of investment decisions, but should strengthen considerably in 2021-2022, supported by both private and public investment.

Exports of goods are expected to fall in 2020, reflecting weaker external demand as a result of a sharply deteriorating international environment. Tourism receipts in 2020 are expected to contract significantly, as the measures taken to contain the spread of COVID-19 particularly hurt the tourism-related sectors, while demand for the tourism product is also expected to decrease. Shipping receipts will be negatively affected by the world economic downturn and the decline of global trade. Exports of goods and services are expected to post robust growth in the next two years, driven by the recovery of external demand and improved structural competitiveness. Finally, imports can be expected to develop in line with domestic demand and exports over the entire projection horizon.

Inflation, as measured by the Harmonized Index of Consumer Prices (HICP), is expected to post a negative annual rate in 2020, mainly on account of the downward course of international oil prices, but also of the prices of services, and is projected to pick up slightly by the end of the projection period. Core inflation is expected to remain close to, or marginally below, zero this year, and return to a positive, albeit low, rate by 2022.

The extraordinary fiscal stimulus measures aimed at containing the economic impact of the pandemic, combined with the decline in economic activity and public revenue, are expected to lead to a deterioration in the general government primary balance and debt, compared with the budget forecasts. According to the baseline scenario of the Bank of Greece, the general government primary balance is projected to record a deficit of 2.9% of GDP in 2020, due to the sharp deterioration of economic activity, as projected by the Bank of Greece, and to the fiscal measures introduced by end-May 2020.

The greatest risk is associated with the possibility of a new wave of the COVID-19 pandemic. In addition, the anticipated rise in non-performing loans as a result of the projected recession would limit the provision of credit to businesses and households, thereby delaying the recovery of investment and economic activity. These factors would slow down the recovery, considerably worsen fiscal aggregates and lead to a new increase in the already high public debt. Furthermore, a deterioration of the refugee crisis could have negative repercussions on tourism. Upside risks are associated with a faster implementation of structural reforms and privatisations.

The risks arising from the external environment are associated with a weaker than anticipated recovery of the global and European economies, due to a new surge of the pandemic, and with a deterioration of the financial crisis. The content and timing of an agreement on the future relationship of the United Kingdom with the European Union are an additional factor of uncertainty. Faster progress on the medical front in addressing COVID-19 would reduce uncertainty and quicken the recovery of the global economy.

Banks’ pre-tax profits in the first quarter of 2020 came to 18 million euros, down by 87% year-on-year. In terms of capital adequacy, based on March 2020 data, both the Common Equity Tier 1 (CET1) ratio and the Capital Adequacy Ratio on a consolidated basis remained above regulatory requirements (at 14.5% and 16.1%, respectively). With a fully phased-in International Financial Reporting Standard 9 (IFRS 9), the CET1 and the Capital Adequacy Ratio come to 12.1% and 13.8%, respectively. However, more than half of banks’ capital corresponds to deferred tax credits (DTCs), and this proportion is expected to increase in the context of the current NPL reduction strategy. Based on provisional supervisory data of March 2020, non-performing loans (NPLs) came to €60.9 billion, down by 7.6 billion euros (or 11.1%) from end-December 2019 and by €46.3 billion from their peak in March 2016. The outbreak of the pandemic has changed the situation. As a result, banks have revised their securitisation plans in terms of timing and loan perimeter. This will delay the further reduction of the high stock of NPLs. At the same time, despite the positive measures taken by the government and banks, an inflow of new NPLs is expected, especially from early-2021. The volume of this new generation of NPLs will depend on the magnitude of the recession and the rise in unemployment this year, as well as on the subsequent recovery.

The coronavirus pandemic is expected to significantly worsen some of the legacy problems (the high public debt, the high rate of unemployment, the high NPL ratio and the large investment gap) from the debt crisis of the 2010s. These problems only add to the challenges already faced by the Greek economy and which constrain its long-term prospects: low structural competitiveness; the slow digitalisation of the economy; a high level of tax evasion; the brain drain; climate change and the cost of transition to a lower carbon economy; the migrant-refugee crisis; a projected demographic decline on account of population ageing; and the large negative international investment position.