Macro roundup: Parting clouds

Greece's public finances have weathered the storm from the pandemic

The central government’s budget execution numbers for September suggest a turning point has been reached in Greece’s fiscal response to the pandemic, with the acute phase of the crisis impact on public finances now receding in the rear-view mirror.

A third consecutive monthly primary surplus meant that the year-to-date deficit was smaller than for the equivalent period of 2020 for the first time in September. The primary deficit, at 5.96 billion euros, was 1.8 billion euros less than had been forecast for this stage of the year in the 2021 budget.

Expenditure in the fist nine months of the year was in line with the target. The outperformance came from the revenue side, thanks to the arrival in August of 2.3 billion euros from the EU’s Recovery and Resilience Facility, which hadn’t been included in the 2021 budget.

The situation was looking much bleaker near the start of the year. The lockdown that came into effect at the end of 2020 meant new support measures, and the targets already looked wildly optimistic before 2021 even begun.

That the budget has come back into line with its original targets just a few months after the lockdown was lifted is a strong reminder that automatic stabilisers work in both directions. It also shows how the best way to prevent an economic crisis from knocking a budget deficit into a downward spiral is to use public finance to shield economic activity until the storm passes.

At the start of the year, the imperative was to use the national budget as a bridge until the arrival of RRF funds in the second half of 2021, which would then take over as the main source of fiscal stimulus for the coming years. With the arrival of the first of those funds, we’ve now entered this new phase.

That has meant the tapering off of Covid support measures, which dropped to a low of 280 million euros in September.

The composition of that support has also changed drastically over the summer. When the government spent 1.5 billion euros in April, almost three quarters of that was either compensation for furloughed employees or refunds for tax advance payments. Most of the reduced support in August was in working capital subsidies for restaurants, while over 60 percent of last month’s support was for small and very small enterprises in the regions.

This is all a cause for much relief. The worry, at the start of the year, was less about the innate sustainability of public finances as it was about the political will to provide the support needed until the economy rebounds. The stabilisation of the budget means we can hopefully relax on this front (usual disclaimer: barring a new strain of the virus causing the health situation to take a drastic turn for the worse.)

Meanwhile, the International Monetary Fund this week forecast in its Fiscal Monitor that the general government primary deficit will narrow slightly to 7.2 percent of gross domestic product this year from 7.5 percent in 2020, before shrinking further to 1.3 percent in 2022 and then moving into a 0.2 percent surplus the year after that.

Other data

  • The unemployment rate continued to go down in August, dropping to 13.9 percent from 14 percent in July.

  • The import price index rose 18.7 percent in August compared with a year earlier, down from a peak of 28.2 percent in April. The increase was heavily concentrated in energy, where prices rose 52 percent. The next highest-rising category was intermediate goods, where prices rose 9.3 percent.

  • Building activity, as measured by the number of permits issued, rose 7.1 percent in July, compared with the same month of 2020.

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Next week’s key data

Thursday, Oct. 21:
  • August balance of payments (Bank of Greece)

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