* IOBE says economy to shrink by up to 4.2 pct this year
* Sees it stabilising next year
* Athens still needs to keep public spending in check
By George Georgiopoulos
ATHENS, Oct 14 (Reuters) - Greece's economy may shrink by upto 4.2 percent this year but is close to stabilising after sixyears of sharp contractions that have wiped out about a quarterof output, influential think tank IOBE said on Monday.
Greece now needs to ensure that wage hikes do not exceedproductivity growth and keep public sector spending in check toavoid the return of large fiscal shortfalls, the independentAthens-based think tank said.
In its quarterly report, IOBE said the 183 billion euroeconomy was set to shrink by 4.1 to 4.2 percent in 2013,revising down a forecast made in July of a contraction of up to5 percent. The new projection is more in line with the latestestimates by the country's foreign lenders.
"The Greek economy is very close to a stabilisation point,"IOBE said. "The twin deficits which reflected its chronicpathology are approaching a balanced level, and the six-yearrecession seems to be gradually reaching its end."
IOBE's latest outlook chimes with estimates by the European Commission and the International Monetary Fund, whichfinanced Athens' two bailouts. They expect the economy to shrinkby 4.0 percent this year, its sixth straight year of contractionand after a 6.4 percent decline in 2012.
The think tank said the economy performed better thanexpected in the second quarter and further improvement is likelyin the third, partly due to a strong tourism season, but it saidit expects a weaker performance in the final quarter.
The six-year slump which has left the economy about 25percent smaller is likely to end in 2014, it said, but it urgedauthorities to avoid complacency. It did not give a forecast forgross domestic product next year.
"It would be inefficient and unfair for the economy toemerge from the crisis, smaller by one quarter, without havingused the crisis to change in ways that will bring growth," IOBEhead Nikos Vettas told reporters.
Stability must not be put at risk, the think tank said,urging adherence to two basic rules - wage growth should notoutpace productivity growth and the public sector must not spendmoney it does not have.
IOBE - which was formerly run by Greece's Finance MinisterYannis Stournaras - projected the country's unemployment ratewill average 27.5 percent this year, revising down a previous28.3 percent forecast.
Unemployment was 27.6 percent at the last count in July.
Greece expects to end the year with a primary surplus of 0.2percent of gross domestic product (GDP) at general governmentlevel, and hopes this will bring debt relief from itsinternational creditors.
It also has plans to tap bond markets in the second half of2014.
"Greece will be able to tap markets and gain independencefrom official sector financing when markets become convincedthat the risk of remission is out of the picture," Vettas said.
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