Capital Economics expects the Greek economy to remain in a deep and prolonged recession despite the planned new bailout being quick and smoothly implemented.
In a release, Capital Economics noted that the proposed new bailout would cover Greece’s financing needs for a full three years instead of the short extension to the last bailout discussed before the referendum.
This postponed the concerns over a Greek default and exit from the eurozone, Grexit, including its negative effects on confidence and economic activity, the firm noted.
Jonathan Loynes, Chief European Economist at Capital Economics, said that the Greek economic conditions may soon start to return to normal on hopes from the provisional agreement of a third bailout and the reopening of the country’s banks, with several factors appearing to support the belief.
Loynes listed out three strong reasons for the economy’s inability to return to anything approaching normal for an extremely long time. In the near term, limits on the withdrawals and restrictions on foreign transfers could weigh on activity, he added.
The economist noted that the Greek economy will be negatively impacted by the tax and spending measures that was included in the bailout conditions. He does not expect the economy to bounce back quickly or even slowly even if the withdrawal limits are lifted and budget targets are adjusted.
He expects Greece’s inflation to remain negative for a long time, with upward effects on the already sky-high debt-to-GDP ratio, as suggested by the vast amount of spare capacity, despite Greek economy returning to growth.
“Overall, we expect the Greek economy to contract by about 3 percent this year and possibly much more, with little improvement in 2016. Against that background, the new bailout is likely to unravel quickly and a Greek exit from the currency union remains more likely than not,” said Loynes.
The material has been provided by InstaForex Company – www.instaforex.com