Greek Parliamentary Budget Office Warns GDP Could Drop by 1.2% Over 3 year Period Due to Wage Rises

The Greek government should implement policies to improve supply chain competition, according to a report for the fourth quarter of 2023 presented on Monday by the Chair of the Parliamentary Budget Office of Greece, John Tsoukalas, warning that the GDP could drop by 1.2% over 3 years (2.4 billion euros).

The report suggests that while policies aimed at price transparency and monitoring illicit profits in the market, especially in food products and essential services, is a step in the right direction, applying effective policies to boost market competition would facilitate curbing inflation even more, compared with broad fiscal interventions supporting incomes, given the fiscal cost linked with the latter.

The report emphasizes the significance of the Recovery and Resilience Facility in boosting the economy, presenting a scenario about how to address inflation, which, as it notes is a serious problem not only for households but also for the competitiveness of the Greek economy.

In this scenario submitted in the report, excessive inflation arises from intense demands for nominal wage increases at a significantly higher rate than the sum of inflation and productivity. This leads to a counterproductive and self-perpetuating spiral of wage and price increases, eventually resulting in a one percentage point uptick in inflation for 2024, reaching 3.9%.

The analysis continues by warning that higher inflation compared to key trading partners, would harm the Greek economy’s international competitiveness, resulting in:

a) a reduction in exports,
b) a decrease in employment, real wages, and private consumption, and
c) a decrease in investments.

According to calculations, this scenario leads to GDP losses of approximately 2.4 billion euros – equivalent to 1.2% of GDP – over a three-year horizon.

The Office cautions against deviating from the target set for inflation as this would negatively impact the whole economy, recommending restraint regarding excessive increases in nominal wages. “Increases should be commensurate with the economy’s capabilities to avoid undermining its competitiveness,” the report notes.

The office underlines that based on the Harmonized Index of Consumer Prices (HICP), for February 2024, inflation slightly de-escalated, with the rate standing at 3.1%, marginally lower than January (3.2%). For the entirety of 2023, inflation was at 4.2%, indicating progress in its moderation compared to February 2023 when it stood at 6.5%.

According to the Office’s analysis, this trend is primarily attributed to the significant decline in energy costs, which now negatively contribute to inflation dynamics.