July 9, 2012 / 3:52 PM / 8 years ago

RPT-UPDATE 2-Greek economy heading for 7 percent tumble

(Repeats without changes to additional clients)

* IOBE widens 2012 GDP forecast to -6.9 pct from -5 pct

* Also hikes unemployment forecast to 23.6 pct

* Consumer spending set for further squeeze

* Think tank run by finance minister until last week

By George Georgiopoulos

ATHENS, July 9 (Reuters) - Greece’s crippled economy will fall a steeper-than-expected 6.9 percent this year, a think-tank formerly run by the new finance minister said on Monday, a tumble that will hamper efforts to cut the deficit and bring yet more pain to Greeks.

Such a decline would mean Greece’s economy has shrink by a fifth since the end of 2007.

It was underlined by data showing the construction sector still in a deep slump.

The growth forecast, from the Foundation for Economic and Industrial Research (IOBE), could give Athens more ammunition as it tries to persuade euro zone partners and the IMF funding its 130 billion euro rescue package to ease up on the austerity measures it blames for deepening the recession.

Headed by Yannis Stournaras until he became finance minister last week, IOBE said the government could follow a 100-day programme to kick-start the economy that included paying arrears on more than 6 billion euros the state owes the private sector, and funnelling available funds to large infrastructure projects.

Greece’s new conservative-led coalition government has promised to bring its economic reform programme back on track through privatisations and long-discussed reforms in a bid to show it means business and regain credibility with lenders.

In April, IOBE had projected a 5 percent GDP slump for this year. In its fifth year of recession, the economy shrank 6.9 percent in 2011.

“If our recession forecast is confirmed, we will have lost about 20 percent of our GDP in the last five years,” said IOBE economist Angelos Tsakanikas.

“The situation in the construction sector is dramatic. Just 0.04 percent of the population plan to buy a home this year based on responses to a survey - that’s about 3,500 people, very low,” he said during a presentation of the quarterly report.

Fresh data by the country’s statistics service ELSTAT on Monday showed the slump in construction, a growth driver in the years that preceded the debt crisis, continued unabated in April. It said building volume was down 27.3 percent year-on-year that month.

Tighter bank credit coupled with cuts in wages and pensions have squeezed household disposable incomes, weakening demand for new homes, while a property levy to fill state coffers has also taken a toll.

Also raising its forecast for unemployment to 23.6 percent from 20 percent, IOBE said much would depend on consumer spending in the rest of the year. Household budgets will be squeezed by a deteriorating labour market, falling wages and additional measures that may be imposed to shore up public finances.

IOBE’s gloomier outlook is bleaker than EU Commission and IMF projections, which respectively predict the 215-billion-euro economy will contract 4.7 to 4.8 percent this year.

It is also more pessimistic than forecasts of 5.3 percent by the Organisation for Economic Cooperation and Development and 5 percent by the Bank of Greece.

“Restoring credibility will require systematic, arduous and targeted efforts. Greece must convince its partners that it will do what is needed to implement the reforms it has committed to,” the think tank said. (Editing by Deepa Babington, Jeremy Gaunt)

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