- GDP expected to fall 1.4% in 2015 reflecting capital controls
- Recapitalizing banks will be top of new government's agenda
Whoever wins the elections in Greece on Sunday faces an unenviable task. Far from the spoils of victory, the country’s next prime minister -- likely to be either Syriza’s Alexis Tsipras or New Democracy’s Evangelos Meimarakis -- will be rewarded with a damaged economy, near-record unemployment and crippled banks.
The first review of Greece’s third aid program, signed by Tsipras last month just before he called the ballot, begins in October. The new premier will have to oversee the recapitalization of banks and keep the budget and state-asset sales program on track. He’ll have to do this against the backdrop of an economy that will probably be feeling the squeeze from the imposition of capital controls at the end of June.
While Greece’s economy showed surprising resilience in the second quarter, growing 0.9 percent, manufacturing and economic sentiment surveys suggest it could crash in the second half of the year.
“Most of the monthly indicators are pointing to a pretty sharp contraction in the third quarter,” said Nick Kounis, head of macroeconomic research at ABN Amro Bank NV in Amsterdam. “Historically, we also know from capital controls that they tend to have quite negative and long-lasting effects on activity.”
The consensus forecast from 19 economists surveyed by Bloomberg is that GDP will contract 1.4 percent this year. That compares with an expansion of 2 percent projected in January, before Tsipras was elected on a pledge to tear up the country’s bailout accord.
The first priority of the next government will be to recapitalize the country’s banks, which were shut for three weeks in July amid the turmoil, seen as a precondition for the lifting of capital controls. The new rescue package sets aside 25 billion euros ($28 billion) for the task, the same amount that was pumped into the country’s four biggest lenders under the last bailout.
One concession that Tsipras secured from eight months of negotiations with creditors was an easing of fiscal targets. Still, the government will need to act to ensure finances remain on track to meet a budget-surplus goal of 3.5 percent in 2018.
If these challenges weren’t discouraging enough, the government will need to attract investment if it is to bring down the country’s jobless rate, which is set to remain near 25 percent for a fourth year in 2015. The latest economic setbacks mean economists now forecast the rate to start rising again in 2016.
“The economic situation is going to get worse in the coming time and that will start to affect the labor market,” Kounis said. “That partly explains the timing of this election: to get it in before the bad news really hits home to the electorate.”