Greek economy to shrink another 4.5% this year: central bank

(ATHENS) - Greece's struggling economy will contract by another 4.5 percent of output this year ahead of a possible rebound in 2013, the Bank of Greece said in an annual report on Monday.

"The recession is expected to continue in 2012 and according to temporary estimates, the average annual contraction in gross domestic product will be in the order of 4.5 percent," the Bank said in its annual report on monetary policy.

It added that the economy, now in a fifth year of recession, shrank by 6.9 percent in 2011.

The average unemployment rate rose to 17.7 percent and is expected to exceed 19 percent this year.

Greek bank deposits fell by around 35 billion euros during the year, and the rate of bad loans rose to 14.7 percent by the end of September from 10.5 percent at the close of 2010.

And despite a wave of austerity measures imposed in return for EU-IMF loans, the public deficit had come in at 10.6 percent in 2011, the Bank said, compared to a target of 9.0 percent.

"During 2013 it is estimated that the economic recovery can begin," it said, forecasting a possibility of fewer job dismissals and lower inflation.

The European Commission last month said the Greek economy would shrink by 4.4 percent in 2012 compared to a previous forecast of 2.8 percent, while the International Monetary Fund estimated the contraction at 4.8 percent.

The IMF last week decided on a new 28 billion euro ($36.5-billion) loan for Greece.

The loan approval came days after eurozone ministers signed off on their part of a huge 237 billion euro rescue plan for Greece, that combines 130 billion euros in new financing and 107 billion euros of debt reduction by the private sector.

The IMF last week said the Greek economy was expected to exit recession only in 2014, not 2013 as forecast in December.

But even with growth in the low digits beginning in 2014, Greece's public debt would be on track to meet the loan programme's target of bringing it back below 120 percent of gross domestic product by 2020.

The Bank on Monday said there was "justifiable" suspicion towards Greece's commitment to reforms.

"Often in the past, reform initiatives have run afoul of the illusion that the system that produced prosperity through deficits and debt could be sustained indefinitely," it said.

"Today there is no room for such illusions...the country must take the historic responsibility to create and apply a new strategy able to persuade that the Greek economy can be reformed in a way that will restore it to a path of growth," the Bank said.