Greece will return to recession this year and contract next year too after policies by the left-wing Syriza government destroyed confidence and led to capital controls, the European Commission forecast yesterday, but the economy should rebound in 2017.

The new forecasts by the European Union executive arm are in sharp contrast to its predictions from May, when it still expected the Greek economy to grow by 0.5 per cent in 2015 and 2.9 per cent in 2016.

“The unsuccessful conclusion of the (second bailout), the referendum called in June 2015, the ensuing bank holiday and the introduction of capital controls raised uncertainty and deteriorated the growth outlook,” the Commission said.

“Confidence suffered, reflected in the Economic Sentiment Indicator (ESI) and the Purchasing Managers Index (PMI), the latter plummeting to historically low levels in July and August 2015,” it said.

The Commission now expects the Greek economy to contract 1.4 per cent this year and 1.3 per cent in 2016 after growth of 0.7 per cent last year. The Greek economy is to expand again, by 2.7 per cent, in 2017.

“Recovery is expected in the course of 2016, supported by a rebound in confidence, the stabilisation of the financial sector following the banks’ recapitalisation expected at the end of 2015, and the consequent relaunching of investment and privatisation projects,” the Commission said.

“Nevertheless, the economy is projected to contract by 1.3 per cent in 2016 amid negative carryover effects from 2015. In 2017, GDP growth is set to gather speed and is projected at 2.7 per cent as implemented structural reforms strengthen aggregate demand,” it said.