Morgan Stanley: Greek Economy Faces Rent Inflation Challenge But Maintains Strong Growth Outlook

• Rent Inflation Threat: Rent inflation in Greece has surged to 10.5% (vs. 2.9% in the Eurozone), with 35% of households renting and lower-income households spending 22% of disposable income on rent, potentially curbing consumption.
• Housing Supply Issue: Due to underinvestment since the financial crisis, limited housing availability drives high rental costs. Increased construction could stabilize prices.
• Economic Growth: GDP growth is projected at 2.2% in 2025 and 1.8% in 2026, fueled by Recovery Fund investments and foreign direct investment.
• Labor and Debt: Unemployment is at its lowest since 2009 and is expected to decline further. The debt-to-GDP ratio is projected to drop to 143% by 2026.
• Tourism Resilience: Recent U.S. dollar weakness is unlikely to significantly impact tourism, as U.S. visitors contribute only 7% of tourism receipts, and price differences for services remain substantial.

Morgan Stanley “stands” by the threat to the economy from the rapid increase in rents in its new report on Greece, nevertheless stating that it is positive about the economy’s prospects.

As the American bank notes, although inflation in Greece has declined and is estimated to reach 2.1% this year, from 2.7% in 2024, the price reduction has not “passed through” to all categories. As it emphasizes, rent inflation continues to rise, having reached 10.5% (compared to 2.9% in the Eurozone).

Morgan Stanley notes that about 35% of households in Greece are renters and that lower-income households spend at least 22% of their disposable income on rent. Therefore, as it emphasizes, a large increase in rent could hit the disposable income of poorer households, potentially creating a threat to real consumption.

As it notes, one reason behind Greece’s sharp increase in housing prices is the limited availability of housing, as the country has under-invested in the sector since the financial crisis. “The need to build more housing, thereby bringing rental prices lower, could serve as an incentive to further boost housing construction in the future,” the American bank points out.

Morgan Stanley: The threat to the Greek economy from the sharp increase in rents

However, Morgan Stanley remains broadly positive on the prospects for the Greek economy. It expects two more years of strong growth, with GDP growth of 2.2% in 2025 and a slight slowdown in 2026 to 1.8%. It sees investment as a key “lever” of economic activity, thanks to the continued implementation of the Recovery Fund and the increase in foreign direct investment.

Private consumption growth is expected to slow, while net exports make a negative contribution in 2025-2026. The unemployment rate has reached its lowest level since 2009 and MS expects it to continue to decline, also thanks to strong economic growth. It also expects a further decline in the debt ratio to 143% of GDP in 2026, while it estimates that Greece is likely to continue to maintain a large primary balance, supported by strong nominal growth and a tightening labor market.

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At the same time, the American bank refers to the recent weakness of the dollar, noting that it does not pose a threat to tourism in Greece, although investors are concerned that it could negatively impact international tourist flows, acting as a brake on the Greek economy and Greece’s performance.

“We are not particularly concerned at this stage,” Morgan Stanley notes. As it explains, American tourists contributed only about 7% of tourism receipts to Greece in 2024. IMF research shows that a 10% depreciation of the country of origin’s currency could lead to a 1.1% decrease in tourist volumes to a given country. Based on this sensitivity, the impact of the recent dollar depreciation on the Greek economy would be minor, it points out, adding that the price difference for services remains large between the US and Greece, further reducing the significance of a dollar depreciation for international tourist flows.

Source: greek city times