The Greek economy is undergoing a period marked by improving investor sentiment and expectations momentum amid a less favourable international economic environment that has been damped by uncertainty around BREXIT, rising trade tensions and the slowdown in growth in the euro area that is primarily attributable to the decline in manufacturing in Germany. The remarkable improvement in business and consumer confidence, off the back of renewed political stability and the expected shift to a more pro-growth policy mix, combined with the uptick in market sentiment towards the Greek economy, as reflected in the marked decline of GGB spreads and the full lift of capital controls, raises the prospects for an acceleration of domestic economic activity in the coming quarters through the establishment of a business-friendly environment and an expected rebound in investment.

The gradual recovery of Greek economic activity from 2017 onwards continued in the first half of 2019, with real GDP growing by 1.5% on an annual basis (1.1% y-o-y in Q1 and 1.9% y-o-y in Q2, respectively). Real GDP growth in H1 2019 was supported by an increase in public consumption (1.9% y-o-y), off the back of pre-election handouts and inventory accumulation, while private consumption (-0.1% y-o-y) and investment broadly stagnated. The contribution of net exports was negative as a result of the slowdown in growth in the euro area and this has been a contributing factor to the deceleration of Greek export growth. On a quarterly read, in Q2 2019 the economy grew by 0.8% vs. the previous quarter (seasonally adjusted data), mainly due to higher public consumption (+4.3% q-o-q).

The latest baseline forecast for real GDP by the European Commission (Summer 2019) envisages a growth rate of 2.1% in 2019 which is expected to pick-up to 2.2% in 2020. According to the recent projections by the Ministry of Finance, as included in the Draft 2020 State Budget (October 2019), domestic economic activity is expected to pick up speed in 2020; real GDP growth is estimated to reach 2% in 2019 and accelerate to 2.8% in 2020.
In spite of the downside risks related to the conflux of international headwinds, the strong positive readings of several survey-based leading indicators over the past months raise and support the depth and breadth of real GDP growth going forward. In particular:
• The Economic Sentiment Indicator (ESI) recovered to pre-crisis levels, reaching 107.2 units in September 2019 and outperforming the EA-peer indicator for the 3rd consecutive month.
• Business confidence in all sectors of the economy, except for the construction sector, have recovered close to their maximum levels reached in the past two decades (Graph 2). The expected shift of fiscal policy towards a growth-friendly policy mix, via the reduction in corporate tax rates and taxation in dividends, bolsters business confidence.
• Consumer confidence has recorded in September 2019 (-6.8) its best performance since October 2000. Although consumer confidence is observed to typically improve in almost every electoral cycle, this time it exhibits a higher-than-usual persistence. This development is mainly underpinned by the minimum wage hike and the rise in employment, while the recent reductions in the VAT rates in food services and energy and in the unified property tax (ENFIA) are expected to further support consumers’ purchasing power.
• The Greek Manufacturing Purchasing Managers’ Index (PMI) stood at 53.6 in September 2019, marginally declining from 54.9 in August, but remaining firmly above the threshold of 50 for 28 months in a row.  Additionally, business sentiment and consumer confidence are supported not only by the enhanced political stability but also by the promising expectations of the pro-growth policy agenda of the newly elected government. The key priorities of this agenda include a broad reduction in tax rates, an acceleration of the privatisation program and other investment projects and a commitment to tackle bureaucracy and digitalize the State. In addition to the unified property (ENFIA) tax rate cut by 22%, on average, already legislated in 2019, the 2020 Draft State Budget foresees a series of fiscal measures, including a reduction of (i) the corporate tax rate, from 28% to 24%, (ii) the taxation of dividends, from 10% to 5%, (iii) the personal income tax rate for incomes under Euro 10,000 annually, from 22% to 9%, and (iv) the social security contributions for full-time employees. In addition, the 2020 Draft Budget includes the suspension of VAT in building activity and of the goodwill tax on real estate transactions for 3 years. The aim is to improve the business climate and attract private investment to sustain the economic recovery and boost medium-term GDP growth potential. A prerequisite for achieving high growth rates is the upgrade of Greece to an investment-grade rating within the next year.

According to the latest available provisional data by the Bank of Greece, the recovery dynamics in residential property prices accelerated further in Q2 2019, with nominal apartment prices rising by 7.7% y-o-y (2018: 1.7%) creating equity gains for the post-crisis investors and partly offsetting excessive losses incurred during the previous decade. The increase was broadly similar for new apartments, i.e. up to 5 years old (7.7% y- o-y) and old apartments, i.e. over 5 years old (7.6% y-o-y). A breakdown of the index by region (Graph 6) reveals that the rise in apartment prices was more pronounced in Athens (11.1% y-o-y) compared to the rest of Greece (Thessaloniki: 7.0% y-o-y; other cities: 4.1% y-o-y; other areas: 4.9% y-o-y). The rise in prime investment commercial property prices accelerated in 2018, as nominal retail and office prices rose by 4.3% and 7.0%, respectively (provisional figures).

The recovery dynamics in both commercial property sectors exhibited, however, great variation across regions in 2018; retail and office prices recorded stronger annual increases in Athens (by 7.4% and 9.0%, respectively) compared to Thessaloniki (0.3% and 5.4%, respectively) and the rest of Greece (0.8% and 5.1%, respectively). The construction sector registered its first year of recovery in 2018; this was reflected in the 17.8% increase in the Production Index of Building Construction and the revival in residential investment, which embarked on an upward trend for the first time in 2018, after almost a decade of consecutive declines, and broadly coincided with the recovery in house prices. The perception that a revival in residential investment is underway relies on the positive correlation between real estate prices and residential investment, showed by the slope of the regression line on the Graph 7.

In Q1 2019, the construction sector, along with tourism, had the largest positive contribution to the GVA growth (0.9 pps). In addition, over the past two years, private construction activity in terms of volume is trending upwards. The construction sector’s prospects are set to strengthen further in the coming years as the economy is expected to retain its recovery dynamics. In parallel, the reduction in the unified property tax (ENFIA), already in effect from 2019, along with the acceleration of the investment implementation in Hellinikon and other planned large investment projects in Athens and Thessaloniki is expected to further boost construction activity.

It is also worth noting that the net capital inflows from abroad for property purchasing in Greece increased by 172.1% in 2018, reaching €1,128.2 million compared to €414.7 million in 2017, while, in the first semester of 2019, rose by 94.6% y-o-y, reaching €736.6 million from €378.5 million in the respective period of 2018. The recovery in the Greek housing market is expected to continue in the coming quarters, in line with the recovery of domestic economic activity. Additional factors which support the recovery in residential real estate prices relate to:

i. The rise in the short-term rental market via the expansion of home-sharing platforms in the centre of Athens and other tourist destinations,

ii. The Golden Visa Program, in the context of which residence permits are granted to third country nationals who purchase real estate property exceeding € 250,000

iii. The recently legislated reduction in property tax by 22% on average and the announced suspension of VAT in building activity and capital gains tax on real estate transactions for three years.

Private Building Activity
Private building activity increased in H1 2019 by 1.3% y-o-y in terms of number of building permits, while it declined by 7.6% y-o-y and 6.9% y-o-y in terms of surface and volume respectively. In June 2019, the number of building permits increased compared to June 2018 (+5.4%), with an increase of 10.8% in terms of surface and 1.1% in private building volume (y-o-y). The business expectations index in private construction declined in September to 59.8 points from 76.0 points in July, slightly higher than a year ago (58.9 points).

Travel Receipts and Tourist Arrivals
In the first seven months of 2019, travel receipts increased by 13.6% on an annual basis, driven by a rise in receipts from both EU-28 (12% y-o-y) and non-EU residents (17.9% y-o-y). During this period, tourist arrivals increased marginally by 0.6% y-o-y, resulting in a rise by 13.1% on an annual basis in the average expenditure per trip from €591.1 to €522.5 in the respective period of 2018. The geographical decomposition of tourist arrivals (excluding cruises) during this period reveals a decline in tourist arrivals from the EU-28 by 1.8% y-o-y, while tourist arrivals from non-EU countries posted a 6.1% y-o-y increase. A marked rise was recorded both in the number of inbound visitors and travel receipts from the United Kingdom, France and the US, while tourist arrivals and receipts from Germany and Russia declined. In spite of the resilience of Greek tourism in the first seven months of the year, the recent collapse of UK tour operator Thomas Cook is expected to moderately affect the Greek tourism sector. According to the recent report by the Research Institute for Tourism, losses by the hotel industry in 2019 are estimated at around €315 million. Although the effects of the above development cannot be easily quantified, the fact that it took place at the end of the peak season allows for adjustments to mitigate the negative impact in the coming year.