Economic and fiscal clouds blown in with Storm Daniel


Approximately one week since Storm Daniel hit the plain of Thessaly, the devastating effects are becoming increasingly evident and with it the government appears to be adjusting its damage estimates and the policy response.

As the water recedes, it is clear that the plain of Thessaly is virtually a total loss for now and it could take years before reaching its pre-storm productive capacity, if at all. 

The region provides one of the few plains in Greece and as such has a pivotal role to play in agricultural production and supply, animal farming as well as food processing manufacturing. 

Based on ELSTAT’s latest regional accounts for 2020, Thessaly contributes circa 5 pct to Greek GDP, compared to 48 pct of the Attica region, where most of the economic activity is concentrated in Greece. 

In terms of gross added value, Thessaly offers 14 pct in agriculture, 7.1 pct in manufacturing and 4.1 pct in wholesale and retail trade and this economic activity has come to halt for some time. 

Also, aside from the direct production, the rest of the economic activity will be affected as household consumption will certainly be impacted by the recent events.

The extent of the damage was so severe and the need for immediate compensation that the government was forced to abandon all handout announcements by the PM and prepare a supplementary budget that will include some one billion euros set aside from support in the affected areas.

The state budget will contribute over 600 million euros and the rest will come from EU resources that were made available after the PM met the head of the Commission earlier this week. 

This is rather troublesome for the Greek authorities as throughout the recent challenges it had heavily relied on several types of handouts, assisted by good budget performance and indirect tax revenues boosted by inflation.

Finance Minister Kostis Hatzidakis was almost apologetic during a TV interview when he had to announce that the Market Pass, a grocery shopping subsidy, will not be extended beyond October. 

As we argued last week, despite the good GDP figures for Q2 and the investment grade granted by DBRS, all these developments are taking place in a very challenging environment. This was also confirmed by the ECB on Thursday, which raised interest rates by another 25 basis points following its policy meeting. 

The ECB  revised down once again the growth forecasts for this year and next for the eurozone, to 0.7 pct growth for 2023, from 0.9 pct, and 1 pct from 1.5 pct for 2024. 

The eurozone’s central bank acknowledges that its policy transmission is working because demand is dampened, credit conditions are getting tighter, households and companies are spending less, while the external environment is also challenging with trade slowing.

The ECB projections also highlight that inflation will persist. It has been revised slightly upwards to 5.6 pct this year and 3.2 pct in 2024. 

This is an environment that is very tough to deal with by the Greek authorities, as food inflation is running at double digits, shortages due to the floods are expected to push up prices for key basic goods, and the government has to withdraw all support that was softening to some extent the blow of the cost-of-living crisis. 

Events are compounded by developments on the energy front, with fuel at the pump in Greece having surpassed the 2 euros/litre and the gas and electricity markets also showing some signs of accelerating prices. 

The government will also have to abandon the very generous subsidy packages that it relied on last winter. The focus will now be on vulnerable households. 

Overall, clouds are gathering on the economic and fiscal fronts while the space for responding is narrowing for the Greek authorities.