Greek economy holds up, recovery still uncertain

Greece's recession-hit economy is faring better than expected after its debt crisis this year, but recovery is still far off, economists said as manufacturing data on Monday showed the pace of contraction to be easing.
Greece's effort to regain borrowers' confidence and access to funding from financial markets rests on reducing its budget deficit, cutting the debt burden and implementing reforms to improve growth and address its structural woes. An upturn in the global economy has helped several Greek companies increase exports, offsetting the downturn at home. Metals group Viohalco, Greece's biggest exporter, said sales grew 8.9 percent year-on-year in the first quarter, helped by higher demand from Europe.
Analysts say the economy this year will now likely contract less than the 4 percent forecast by the European Union and International Monetary Fund. But the impact of budget cutbacks may also hold back recovery in the years to come.
"There is quite a big chance the recession will not be as deep as that," said economist Ben May at Capital Economics who expects the slump in economic activity to be contained to 3.5 percent this year.
"The biggest risk for the economy is not a sudden collapse, but a long drawn-out recession," he added. Economic recovery is key for Greece to be able to service its debt once the giant 110 billion euro EU/IMF bailout for the country expires in 2012. By then, Greek debt is expected to reach 150 percent of the nation's GDP.
Improving for a second straight month in July after hitting a 13-month low of 41.8 in May, the Purchasing Managers' Index (PMI) for the manufacturing sector rose to 45.3 from 42.2 in June, a sign of a possible bottoming out. Although it remained well below other eurozone peers and the 50-point mark separating expansion from contraction, analysts said the reading indicates the Greek economy is holding up better than expected.
"The reading conveys the message that the recession is quite bad, but not as bad as feared and that it may have found its floor," said Giada Giani, an economist with Citigroup. A weaker contraction could also make it easier for Athens to meet its deficit target this year. Despite the ongoing recession the government cut the budget gap by 45 percent in the first half, after draconian tax increases and public sector pay cuts. Greece has pledged to cut the fiscal shortfall to 8.1 percent of GDP from 13.6 percent in 2009.