ATHENS Greece's polarized political climate threatens to undermine the economy's chances of recovery, the central bank said on Tuesday, though it joined the government in predicting the country would claw its way out of recession in 2014.
In an interim monetary policy report, the Bank of Greece predicted the economy would contract by about 4.0 percent this year, less steep than the 4.6 percent it projected in May.
It also forecast an end to six years of recession in 2014, seeing growth of 0.5 percent compared with the government's forecast of 0.6 percent.
But it cautioned that a fragile political climate posed risks and urged the country to seek common ground and to push ahead with reforms demanded by the country's foreign creditors.
"A significant problem arises from the political climate, which shows elements of polarization and confrontation in a period when the opposite is required," the report said.
The volatility could reach its peak next year with Greece taking over the rotating European Union presidency on Jan 1, and European parliamentary and local elections due in May, it said.
"If this happens, uncertainty will increase and the elements supporting positive (economic) prospects for 2014 today will be weakened," it said.
Greece's economy has shrunk by a quarter since its recession began in 2008, the downturn exacerbated by fiscal austerity demanded by its international lenders in return for a bailout to rescue it from bankruptcy.
Bailed out twice by the EU and the International Monetary Fund, the country has been kept on a drip feed of funds totaling 240 billion euros which have come at the price of unpopular austerity measures, including tax rises and cuts to pensions and wages.
Despite needing to close a budget gap of at least 1 billion euros in 2014, the country is keen to avoid imposing painful new cuts on a nation struggling to make ends meet and grappling with record unemployment.
A slowdown in the decline of consumption would support recovery in 2014, the central bank report said. It predicted the fall in real disposable incomes will end and demand from outside will have a positive impact, boosted by exports and tourism.
"Signs that the economy is on a stabilization path have strengthened and there are grounds to project that next year the recession will end and the economy will start to recover," the report said.
The central bank also backed the government's prediction that it will post a surplus this year on the primary budget account, which excludes debt servicing costs - a key requirement for further debt relief from its international funding partners.
It expects Greece's current account balance to hit a surplus in 2013, helped by falling imports, strong tourism revenues and rebounding exports.
(Reporting by George Georgiopoulos; writing by Karolina Tagaris; Editing by John Stonestreet)