Greek GDP craters at end of 2016, putting bail-out at risk

A revised estimate for Greek growth at the tail-end of 2016 blew a gaping hole in rosy forecasts for the Mediterranean country's economy and, according to some economists, might jeopardise an agreement to disburse further urgently needed financial aid.

Greece's gross domestic product shrank at a rapid 1.2% pace quarter-on-quarter clip over the three months to December 2016, revised data from Athens revealed.

That was far worse the 0.4% drop government statisticians had originally penciled in, while in comparison to a year ago Greek GDP was down by 1.4%. Over all of 2016 Greek GDP was 0.1% lower.

"This will add to the IMF’s scepticism about Greece’s ability to reach its fiscal targets and increases the risk that the bailout will collapse," said Jennifer McKeown, chief European economist at Capital Economics.

Somewhat ironically, net trade (exports minus imports) exerted a heavy drag on GDP as imports jumped by 4.5% at a quarterly pace, alongside modest increases for household and government spending.

Earlier on Monday, Prime Minister Alexis Tsipras said the economy was poised to post "exceptionally strong" growth.

That was unlikely, said McKeown, pointing to the latest European Commission Economic Sentiment Indicator, which signalled a continued contraction in GDP was on the cards.

McKeown's forecast was for the Greek economy to expand by 0.5% in 2017.

"And today’s data will add to the IMF’s scepticism about Greece’s ability to meet its fiscal targets, which are based on upbeat assumptions that the economy will expand by 2.7% this year and 3.1% in 2018," McKeown said.

"This suggests that the Fund will demand more austerity that Greece cannot deliver. If the IMF pulls out of the bailout, euro-zone creditors will need to agree to more
financial support to avoid a disorderly default and Grexit. And with various elections coming up, that will be difficult to say the least."

As of 1531 GMT the yield on the benchmark 10-year Greek government bond was higher by just two basis points at 7.06% and that on similarly-dated two-year debt flat at 7.99%.