February 16, 2023 3:20 pm

Macro 2023: Eastern European recovery slowed by Russia dependence and higher legacy debt burdens

The improving macro outlook for the euro area should not mask the difficulties that lie ahead for the economic region, businesses and households. The euro bloc is still on the brink of a recession, but that recession that is still expected may now be milder than previously expected. Euro-zone inflation is expected to remain higher for longer and much of this pain in higher borrowing costs for businesses and lower real incomes and purchasing power for households is yet to be absorbed.

The current consensus is for at least another 100 basis points in interest rate hikes by the European Central Bank (ECB) – including 50 bps this week (1 February) and another 50 bps in March. Euro-zone GDP is expected to have averted contraction in Q4, as the mild winter softened energy demand, supported by a prevalence of government energy price caps. Supply shortages have also eased, moderating inflationary pressures on manufacturing-intensive euro-zone economies.

In this final in our series of macro articles on select European economies, we examine the outlook for Greece, Cyprus and Croatia.


Substantial policy reforms in Greece’s economy – from reducing its stockpiles of non-performing loans, to a revival in tourism and exports – has helped boost business and consumer confidence and return GDP to pre-pandemic levels.

The Greek economy is forecast to slow to 1.1% in 2023, down sharply from 5.1% last year, and recover to approach 2% in 2024, according to the Organisation for Economic Co-operation and Development (OECD), as economic activity weakens across the euro area and domestic private consumption slumps.

Greece’s pandemic policies have put the economy on a stronger footing coming into the inflationary-led global monetary tightening cycle, but the nation’s public finances are not yet at sustainable levels. Public debt to GDP levels fell to 175% in 2022, down from more than 200% in 2020, according to OECD data.

Rising energy costs, declining real disposable income, higher lending rates and the increase the cost of debt servicing have all hurt businesses and households.  Moreover, the prolongation of the energy crisis and elevated food prices, due to the ongoing war in Ukraine, keeps upward pressure on inflation, supressing business and consumer confidence and, ultimately leading to slower economic growth in 2023. Greece’s proximity to the land war on Europe’s doorstep adds to the dour sentiment.

Consistent with most of the euro are, annual CPI inflation eased in the Greek economy at the end of last year. CPI inflation increased by 7.2% in December, compared to one year ago, according to the Hellenic Statistical Authority (ELSTAT). Consumer price inflation peaked at 12.1% in the year to October 2022, in the highest levels in 25 years, weakening demand, delaying investment and eroding the purchasing power for households and businesses. In the Greek manufacturing sector, demand conditions are expected to remain weak in 2023. S&P Global forecasts industrial production will contract 1.6% in 2023, after a sharp decrease in sales led by contracting international orders, according to the latest Greece PMI data.

Greek bond yields were more sensitive to international volatility than other European economies, due to its lower credit rating and limited secondary bond market liquidity, according to the Bank of Greece. As a result, borrowing costs for Greek government and corporations repriced higher, increasing the pressure on government spending commitments and corporate balance sheets through 2023. Fiscal sustainability and credibility remain one of the Greece’s paramount political priorities, as the government targets regain an investment grade rating for sovereign debt to expand investment and reduce financing costs.


The Cypriot economy is expected to enter a mild and brief recession until the first quarter, with a gradual recovery from the middle of this year, according to the Central Bank of Cyprus (CBC).

The recession catalysts are consistent to the macro headwinds throughout the euro area. Cypriot GDP is expected to slow to 2.5% in 2023 and grow to 3.1% in the years 2024 and 2025, according to the CBC. Economic activity was forecast at 5.8% in 2022. Forecast GDP downside risks include the possibility of a worse-than-expected outlook for the international demand environment and more persistent lagged effects from higher energy prices.

The unemployment rate was expected to decline to 6.7% in 2022, from 7.5% in 2021. Employment expectations over the coming years implies a marginal downward trend, with unemployment slipping to 6.5% in 2023 and 5.9% in 2024, CBC forecasts suggest.

Inflation is projected to increase significantly in 2022 to 8.1% on harmonised terms, up from 2.3% in 2021, according to the CBC. A gradual normalisation of inflationary pressures is forecast over the coming three years, reaching 3.3%, 1.7% and 1.8%, respectively, significantly due to falling energy prices. Wages will increase in 2023, due to automatic wage indexation. New negotiations on multi-year collective wage agreements will also start from this year.

Cyprus’s high exposure to Russia through its investment and tourism linkages pose significant risks. In addition, Cyprus is entirely dependent on imports of oil and petroleum products for its electricity generation, which leaves domestic inflation and terms of trade highly sensitive to global oil prices, according to Fitch Ratings.


Croatia’s economy is expected to lose momentum in 2023, as inflationary pressures subdue demand from key eurozone trading partners and domestically, slowing goods and service exports. Economic growth is forecast to slow to 0.8% in 2023, according to the World Bank, although a higher absorption of EU funds present upside risks to this outlook through increased public investment. Croatia is entitled to EUR5.5 billion in grants and EUR3.6 billion in loans from the EU, linked to structural reforms across the economy to reduce market inefficiencies, improve fiscal decentralisation and modernise the healthcare and education sectors.

Croatia joined the EU’s border free Schengen zone and adopted the euro on January 1, 2023, which will provide a boost to the economy’s tourism industry, which represents around 25% in GDP and employment share. Euro adoption will also improve the Croatian economy’s resilience to external shocks, according to Fitch Ratings. Croatia joined the European Union in 2013.

Croatia is less exposed to the European energy crisis given diversified energy import sources and large domestic gas storage facilities. Authorities want to significantly expand Croatia’s LNG and gas pipeline capacity to make Croatia a regional energy hub.

Annual CPI inflation increased by 13.1% in December, after rising by 13.5% in November, according to the Croatian Bureau of Statistics, driven by elevated high prices in food, restaurants and hotels, household furnishings, and energy. Croatia’s average annual inflation accelerated to 10.8% last year from 2.6% in 2021 and 0.1% in 2020. Average annual inflation is forecast fall back to 5.6% in 2023 and 3% in 2024, driven by base effects and a slowing economy, says Fitch, adding that the government’s electricity and gas price caps, credited with prevented a higher inflationary spiral, should continue this year.

Wage growth looks to remain contained below inflation despite a tight labour market. Downside risks to the outlook include impact of higher borrowing costs for the government and the private sector, which may pose challenges to public finances and the domestic banking system.

This post was written by James Wallace

James Wallace is an editor, journalist, researcher and corporate writer on economics, geopolitics, finance, real estate, private equity, aviation, infrastructure and technology. He co-founded CoStar News in the UK in April 2011, and now works for multiple media organisations and corporations across writing, research, marketing/PR and consulting. He is an aspiring psychologist.


(Image rights: https://www.istockphoto.com/)

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