COVID-19 – The scenario of a new lockdown puts a break on growth

The possibility of a lockdown is probably “cutting” weeks from the prospects of 2022 during which the Ministry of Finance forecasts that the recovery will reach 4.5% from 6.9% in 2021. Market, businesses and especially professionals in the entertainment industry are watching with bated breath the government movements, while the European cities are having a lockdown one after the other due to the Omicron variant.

The Ministry of Finance is investigating the scientific findings regarding the danger of the Omicron variant and the degree of vaccination coverage. They convey the certainty that there is sufficient resources to deal with any crisis and that preparations have been made for the adverse scenario as they amount to over 32 billion euros.

According to the Deputy Minister of Finance, Theodoros Skylakakis, if it is necessary to take health protection measures at a higher financial cost, this has been calculated in the budget, which has a large Covid reserve. The fact that restrictive measures can be taken, according to the minister, does not mean that we will have a lockdown like the ones we had the past years.

Analysts point out that if the restrictions imposed on Eurozone countries are not lifted by the new year, then the additional financial risks will apply for the first quarter of 2022 – and therefore any restrictions on economic activity will be offset again by additional support measures for households and businesses.

According to a recent UBS report, Greece, Austria, Germany, Belgium, Finland, Ireland, the Netherlands, Slovakia and Slovenia are facing intense pressure with the indices. The nine countries account for 50% of the eurozone’s GDP and record cases close to previous records. If they resort to lockdown, including Greece, UBS estimates that the loss in the growth rates of the Eurozone for the fourth quarter would be in the range of 0.7-0.8 percentage points, which means that the Eurozone would remain stationary.

The bad scenario

Economists are ringing the bell for the possibility of strict measures that could halt the recovery and the Bank of Greece is trying to avoid new generalized restrictive measures. Even the concerns about the measures due to the outbreak of the Omicron variant will have a significant impact on market psychology. In their forecasts, analysts place the pandemic as the number one threat next year as the pandemic lasts longer than predicted, despite the vaccines.

The energy crisis, which may last longer than predicted, consists another risk. Although the majority characterizes inflation as temporary, bells are ringing for the decrease in family budgets and recovery. The ministry does not rule out the possibility that inflation in December will exceed 5% from the levels of 4.8% in November

According to the unfavorable budget scenario, the reduction of the nominal growth rate by 1% in 2022 to 3.5%, means that GDP will reach 185.5 billion euros from 177.6 billion euros in 2021, compared to a nominal GDP of 187.3 billion euros in 2022 which is the basic scenario. Such a change in the level of nominal GDP would lead to a deterioration of the fiscal result by 0.5% of GDP compared to the 2022 Budget scenario.

It is noted that the total value of anti-pandemic interventions in the period 2020-2022 amounts to 43.3 billion euros, of which 23.1 billion euros relate to the year 2020, 16.9 billion euros in the year 2021 and 3,3 billion euros in 2022. The budgetary cost of interventions amounts to 31.1 billion euros, of which 12.0 billion euros relate to the year 2020, 15.8 billion euros the year 2021 and 3.3 billion euros in 2022.

Budget data show that public spending on health is higher in 2022, compared to 2021 and 2019. They reach a total level of General Government in 2022 at 6.3% of GDP. Regular expenditure for the Ministry of Health, excluding COVID emergency expenditure, amounts to 4.52 billion euros in 2022 compared to 4.27 billion euros in 2021, an increase of 250 million euros.

For 2021, COVID expenditures were made by the Ministry of Health, in addition to the above, 944 million euros, while for 2022, COVID appropriations for Health have been provided for 736 million euros. Total expenditure is expected to reach 5,257 million euros in 2022, compared to 5,217 million euros in 2021, increased by 40 million euros. Revenues of hospitals, on a budget basis, amount to 2,689 million euros in 2022, compared to 2,675 million euros in 2021, without the additional health appropriations provided for in the special reserve.

Avoiding generalized measures – The challenges

The multi-page interim monetary policy report submitted to the Speaker of the Parliament records the dynamic recovery, the positive medium-term prospects but also the uncertainties stemming from the course of the pandemic and the evolution of inflation, for which he sees a temporary increase. The latest estimates show that in 2022 the growth rate is projected at 5.0% and in 2023 at 3.9%, provided that the economy will continue to grow significantly from international tourism, the eurozone recovery and the accelerationof investments.

As pointed out in the Report, the main challenge in the short term is the most effective control of the pandemic, as, so far, the vaccination coverage bet is to avoid strict measures, as the central bank rings a bell stating in the report that, in the light of new nariants, the bet is to avoid new generalized restrictive measures. This requires intensifying efforts to expand vaccination coverage of the population and shield health services in order to bring the health crisis under control and reduce pressure on the national health system.

Any new pandemic control measures should have a limited fiscal impact in order to avoid further burden on fiscal figures that will delay a return to fiscal balance. He estimates that there is still increased uncertainty related to inflationary pressures.

An additional important challenge, as reflected in the report of the Bank of Greece, concerns the ability of the public and private sectors to fully and timely absorb the available financial resources from the European recovery instrument in the period 2021-2026 and from the NSRF dyuring the period 2021- 2027.

The Group chief economist at Eurobank, Tassos Anastasatos, in the regular issue of the bank for the Economy states that the most important challenges that the Greek economy has to face are the following:

• The Pandemic. Whether due to poor enforcement, vaccination delays, or new threatening variants, the pandemic threatens to impose new restrictions on social contacts and traveling, while further testing already tired societies and depleted their economies and their reserves.
• Inflationary pressures, especially in the sector of energy, that reduce the purchasing power of incomes and affect competitiveness. Although the ECB considers them to be temporary, the likelihood that they will last longer than originally estimated poses a risk of integrating inflationary pressures into expectations and transmitting them to the labor market, thus consolidating inflation. And while low transient inflation is a relatively easy way to get rid of debt, high and persistent inflation entails restrictive policies.
• The recurrence of twin deficits. Although fiscal support measures were designed to be implemented once and for all, price increases are exacerbating political and social pressures so as to maintain some of them, with implications for markets’ perception of the country’s fiscal stability. In the external balance, a dynamic increase in exports is required so that the structural problem of the large share of imported goods and raw materials in Greek consumption and production respectively, in combination with increases in energy prices, do not end up in a structural deficit.