By Les Manison
The European Commission’s autumn 2021 forecasts for Greece and Cyprus are excessively optimistic, in particular on inflation rates and public finances. By making these fanciful forecasts, implicit support is given to the management of the policies of the economies of Greece and Cyprus, leading the authorities in these countries to postpone the reforms and urgent measures necessary to resolve the serious economic and financial problems. before Covid.
With the persistence of high energy prices and bottlenecks as well as the recent significant depreciation of the euro, it has become increasingly evident that the Commission has underestimated the price increases for Greece and Cyprus in its forecasts.
For Greece, the Commission predicts that consumer prices will increase by only 0.1% in 2021 and 1.0 and 0.4%, respectively, in 2022 and 2023. The GDP deflator is expected to follow a path similar. However, with the annual increase in industrial producer prices in Greece reaching 17.3% in September 2021 and that in consumer prices reaching 3.1% in October 2021 and high prices likely to remain high, it is clear that the Commission’s forecast of hardly any price hikes this year is a gross understatement.
For 2022 and beyond, the Commission assumes that the recent sharp increase in import prices, including freight costs, is temporary and that ‘the transient effects of (higher) energy prices are ‘fade’. But as the global price spike is more persistent than previously predicted by the EU institutions, the price level forecast by the Commission for 2022 for Greece and other EU members is probably considerably underestimated. And the extent of the underestimation of inflation rates in Greece and other countries will depend, among other things, on the extent to which higher prices fuel rising wages and consumer price expectations.
For Cyprus, the Minister of Finance has repeatedly declared that the recent price spike is a temporary phenomenon and seems to corroborate the Commission’s forecast that consumer prices will increase by 1.9% in 2021, 1.7 % in 2022 and 1.2% in 2023 Measures taken by the Cypriot authorities to contain consumer price increases, such as the 10% rebate on electricity charges, can be expected to limit the rate of consumer price inflation just above the Commission forecast for 2021. stubbornly high prices of imported raw materials and fuels are expected to push consumer prices and the GDP deflator to much higher levels to the Commission’s forecast for 2022. In fact, reflecting much higher input prices for electricity, plastics, wood and metal products, prices in Cyprus have increased by 12.7% over the course of from the 12 months leading up to September 2021. It is also questionable whether the full cost of living adjustment mechanism sm will be restored in Cyprus and, if so, whether it will contribute to a wage price spiral.
After increasing by around 7% in the first half of 2021, the Commission predicts that Greece’s real GDP will grow by 7.1% for the year as a whole, which is significantly higher than the summer forecast of 4.3 %, and 5.2% in 2022. These estimates imply that there will be no significant slowdown in economic growth in the second half of 2021 at a time when economic activities are affected by the upsurge in Covid 19 cases , supply bottlenecks and the associated sharp increase in production costs. In addition, supply-side constraints and the pass-through of costs to final producers and consumers could extend into 2022 and reduce real disposable incomes and demand and, with the repercussions of a prolonged increase. of Covid cases on tourism, could reduce economic growth in the coming year. . And in the medium term, delays in the effective implementation of the recovery and resilience plan could also seriously hamper economic growth.
For Cyprus, the prospect of achieving the Commission’s forecast of an increase in real GDP of nearly 5.4% in 2021 is highly likely, as the current pandemic appears to have little impact on economic recovery and increases in the economy. prices currently do not appear to be reducing consumer spending. However, with supply constraints and other related price increases extending through 2022 and financial problems for developers reducing investment in construction activity, as well as declining real disposable income for employees of the private sector dropping consumer demand, Cyprus’s economic growth rate could be well below the Commission’s forecasts of 4.2% for 2022 and 3.5% for 2023. And as in Greece, the inevitable delays of Cyprus in the effective implementation of the much-vaunted recovery and resilience plan, as well as the heavy debt burden of the private sector are factors that may hamper economic growth in the medium term.
For Greece, the Commission forecasts that the public deficit will fall from 10.1% of GDP in 2020 to 9.9% in 2021 and more sharply to 3.9% in 2022, which seems quite unrealistic. Higher budgetary costs due to a much higher rate of inflation than expected and higher expenditure associated with the worsening of the pandemic situation as well as the advance of significant defense expenditure should keep the public deficit at the bottom. above 10% of GDP in 2021 and prevent the public deficit from falling significantly in 2022. And despite relatively large increases in nominal GDP planned for 2021 and beyond, the expected appearance of very large public deficits should mean that the Commission predicts a steady downward trend in the public debt-to-GDP ratio to well below 200% by 2023 is very unlikely to be achieved.
For Cyprus, the Commission’s forecast of a government deficit of 4.9% of GDP in 2021 looks very low, as a series of supplementary budgets increasing public spending in the last months of the year and growing deficits in the country. the national health system are expected to bring the deficit to a much higher level than the forecasts mentioned above. And given the higher budgetary costs resulting from higher-than-expected inflationary pressures, including the payment of COLA to government employees and retirees, as well as political pressures in a pre-presidential year, the Commission has forecast a deficit of 1.4 percent of GDP in 2022 is expected to be greatly exceeded. In addition, the Commission’s forecast of a public debt-to-GDP ratio falling from 115.3% at the end of 2021 to less than 100% at the end of 2022 seems highly unlikely because the maintenance of a relatively high deficit in 2022 and the need to adding to borrowing to help finance the huge external current account deficit in 2022 (the Commission estimates a deficit of 9.1% of GDP) should push public debt well above official forecasts.
The economic forecasts of the European Commission can have a considerable influence on the policies undertaken by member states, especially in countries where constructive policy advice from independent research institutes and individuals is largely ignored by policymakers. . In situations where the Commission presents “favorable” forecasts, but which are overly optimistic, showing that a country is likely to achieve a healthy economic growth rate, modest inflation and a considerable improvement in its public finances, like this seems to be the case with the latest Commission forecast for Cyprus, policymakers are likely to delay reforms and actions needed to tackle serious problems. For example, in Cyprus, the current need for a more cost-effective tax system to help, among others, vulnerable people affected by high prices, is masked by inflation and unrealistic budget forecasts.
Leslie G Manison is an economist and financial analyst specializing in macroeconomic policy analysis, bank sustainability assessments and international financial relations. He is a former Senior Economist at the International Monetary Fund, a former Adviser to the Ministry of Finance of Cyprus and a former Senior Adviser to the Central Bank of Cyprus.