IMF warns persistent inflation and energy prices cloud Greek outlook

The International Monetary Fund (IMF) on Tuesday said that Greece’s economic growth remains robust, supported by strong domestic demand and ongoing reforms under Next Generation EU, although risks from the conflict in the Middle East continue to cloud the outlook.

Specifically, the IMF stated that Greece is well positioned to cope with external shocks, as public sector balance sheets continue to strengthen, reflected in the rapid decline in the debt to GDP ratio.

It added that fiscal policy is shifting to support household purchasing power and housing affordability, while maintaining a balance between growth and prudence.

The Fund emphasised that the right policy mix should focus on growth friendly but prudent fiscal policy, alongside financial system resilience and structural reforms.

These reforms are needed to address low investment, weak productivity growth and adverse demographic trends, which continue to weigh on the economy.

The IMF reported that economic growth remained strong in 2025, with real GDP expanding by 2.1 per cent year on year, driven by accelerated investment projects funded by NGEU and strong private consumption.

It noted that tourism reached a record level, while the unemployment rate declined to 8.3 per cent in the fourth quarter of 2025, close to pre global financial crisis levels.

At the same time, inflation remained persistent at 3.1 per cent in February 2026, reflecting a positive output gap.

The current account deficit narrowed to 5.7 per cent of GDP in 2025, supported by improved terms of trade and lower interest payments, although it remained elevated due to strong import demand.

The IMF highlighted that fiscal sustainability has improved further, despite a significant increase in public investment spending.

Primary expenditure rose in 2025 due to higher investment and targeted measures addressing cost of living pressures, yet the primary surplus remained high at 4.4 per cent of GDP, slightly below 4.7 per cent in 2024.

This performance was supported by strong revenues driven by economic growth and progress in tackling tax evasion.

Combined with the early repayment of Greek Loan Facility loans, the public debt to GDP ratio fell by around 10 percentage points in 2025 to approximately 145 per cent, down sharply from its peak of about 210 per cent in 2020.

The IMF said that banks’ balance sheets remain sound, with credit growth picking up amid easing financial conditions and continued NGEU disbursements.

Credit to the private sector increased by 5.3 per cent year on year in January 2026, driven mainly by demand from non financial corporations.

Mortgage lending returned to positive growth for the first time since the global financial crisis, supported by the MyHome II subsidised loan programme, although new lending volumes remain modest.

The IMF noted that asset quality continues to improve, with the non performing loan ratio falling to record lows.

Bank profitability has declined slightly due to lower interest rates, but remains above the EU average, while capital and liquidity positions are strong.

Looking ahead, the IMF expects growth to moderate to 1.8 per cent in 2026, reflecting a more challenging environment.

It said that higher public investment and recent tax cuts, including broad based personal income tax reductions, will support economic activity.

However, elevated energy prices and weaker external demand linked to the Middle East conflict are expected to weigh on consumption and tourism.

Over the medium term, GDP growth is projected to slow to around 1.5 per cent, due to a declining working age population, low labour participation and weak productivity gains.

The IMF warned that inflation could rise in the near term, while the current account deficit may widen due to higher energy costs, before gradually declining again.

It stressed that risks to the outlook are tilted to the downside, particularly if the conflict in the Middle East intensifies or geopolitical tensions escalate further.

Additional risks include trade fragmentation, financial market disruptions and delays in implementing NGEU projects, which could weaken investment and productivity.

On the upside, the IMF said that stronger than expected fiscal measures and reforms could improve growth prospects.

The Fund highlighted that public finances remain on a strong trajectory, with the primary surplus expected to reach 3.8 per cent of GDP in 2026.

Over the medium term, the primary surplus is projected at around 2.75 per cent of GDP, while the debt ratio is expected to decline further to around 110 per cent by 2031.

The IMF advised that any measures to mitigate energy price shocks should be targeted and temporary, while preserving price signals.

It said support should be delivered through the social safety net to protect vulnerable households, taking advantage of Greece’s digitalisation progress.

Support for businesses should be limited, temporary and focused on viable energy intensive firms, and coordinated at the European level.

The IMF emphasised the importance of fully utilising EU funds to sustain public investment, noting that Greece still faces an investment gap of around 4 per cent of GDP compared with the euro area.

It also called for protecting critical social spending on healthcare, education and housing, which remain below EU averages.

The Fund stressed that further fiscal reforms could improve efficiency and create additional fiscal space, including better evaluation of tax measures and improved public procurement processes.

On the financial sector, the IMF said that risks remain manageable, although vulnerabilities persist.

It highlighted that loan concentration among large corporates requires monitoring, while small and medium sized enterprises and households remain more vulnerable.

The IMF noted that the Bank of Greece has increased the countercyclical capital buffer to 0.5 per cent, effective October 2026, and said it should be adjusted if risks change.

It also welcomed the introduction of borrower based measures and a central credit registry, which will help monitor risks more effectively.

However, it pointed out that legacy issues such as slow resolution of distressed debt remain, largely due to delays in the legal system.

The IMF also warned about the sovereign bank nexus, including risks related to deferred tax credits and state guaranteed assets, which could amplify shocks.

It recommended further strengthening supervision, improving insolvency processes and increasing resources for oversight of credit servicers and cyber risks.

The IMF said that ambitious structural reforms are essential to boost long term growth, including measures to support digital transformation, reduce regulatory burdens and increase labour participation.

It also emphasised the importance of completing the EU single market, improving access to finance and labour mobility, and advancing energy market integration.

On housing, the IMF highlighted that residential property prices rose by 7.8 per cent in 2025, driven by strong demand and limited supply.

It warned that housing affordability pressures are increasing, particularly due to underutilised housing stock and low construction activity.

The IMF recommended policies to mobilise unused housing, expand renovation programmes and improve rental market conditions, while accelerating social housing initiatives.