Greece’s economics statistics disappoint whilst Germany booms, more economic divergence in the Euro Zone

Yesterday was a day where markets tried to settle down after the excitement of the day before which saw some large moves. Some of these are settling down a little for example the exchange rate between the Euro and the Yen saw the Yen shoot up from 112.58 to 109.5 in one day has now retraced a little to 110.7. With the Yen also at historically high levels against the US dollar the slight fall to 85.94 will be welcomed in Tokyo but be in no doubt the level of her currency is a big issue in Tokyo particularly in Japan’s exporting sector. 

Commodity prices also resumed their upwards move with the CRB spot index rising to 445.31 up some 2.11 on the day. The main contributor to the rise was foodstuffs which rose by 3.32 to 379.84 with wheat now priced at US $7.50 per bushel. However those wondering about an increase or perhaps incidence of “agflation” will have to factor into their equations an oil price which has fallen this week with West Texas Intermediate crude oil now priced at US $76.37 per barrel. So the picture is somewhat mixed. Also I wonder if the RMI Independent Petrol Retailers Association whose forecasts for petrol price rises in the UK were something I analysed on Tuesday will be back in the media lowering their forecasts,somehow I doubt it! 

The Greek Economy 

The subject of Greece and her economic travails has been a regular subject for me. Whilst mentions of her in the general media have fallen away substantially I like to return to the subject to monitor what is happening in her economy as she is something of a bellweather. Apart from the issue of accuracy and fairness I question many of the official claims that come out of Greece made by politicians and officials. For example over the past month or two such people have been claiming that Greece’s economic growth will be better than previously forecast. The previous forecasts were in the region of -3 or -4% for this year as rather curiously the EU in its various incarnations had produced different figures. 

Yesterday we received the figures for the second quarter of 2010. According to the Hellenic Statistical Authority. 

Available data indicate (subject to the caveat discussed below) that in the 2nd quarter of 2010, the Gross Domestic Product (GDP) decreased by 3,5% in comparison with the 2nd quarter of 2009 and by 1,5% in comparison with the previous quarter. The decrease of gross fixed capital formation as well as the significant decrease of general government expenditure, have contributed to the decline of GDP. At the same time, the improvement in the external trade balance has partially offset the effect of the above factors 

For those wondering gross fixed capital formation is investment and the caveat is that their has been a change in the way in which government transactions are measured making year on year comparisons potentially unreliable. Considering what has gone on with Greek statistics in the past I have re-read that section several times to see if I can detect a touch of irony! For those who have not followed the saga of Greece’s problems one of the factors in it was that whatever Greek economic statistics particularly her budgetary ones were measuring it often was not the Greek economy, so there is an irony in the new euro zone monitored ones having a caveat when of course the fabricated ones did not. 

If we look at recent figures for retail sales we also see worrying developments. 

The volume of retail trade (i.e. turnover in retail trade at constant prices) as it was published until December 2008, except automotive fuel, decreased by 7,2% in May 2010, as compared to May 2009 . 

The unwelcome trend is reinforced by the latest figures on unemployment. The “Unemployment rate in May 2010 was 12.0% compared to 8.5% in May 2009 and 11.9% in April 2010”. I searched hard to find something a little more optimistic and saw that employment actually rose by 18,380 compared with April although it was down by 122,672 compared with a year earlier. 

If we look at inflation there is not much relief there either according to the Hellenic Statistical Authority. 

The Harmonized Index of Consumer Prices (HICP) in July 2010, as compared to July 2009, increased by 5.5%. A year earlier, the annual rate of change of the HICP was 0.7%. The HICP in July 2010, as compared to June 2010, decreased by 0.4%. A year earlier, the monthly rate of change of the HICP was -0.7%. 

If we now move onto import prices then we see unwelcome changes in the trends there too. 

The Import Price Index in Industry (MPI) in June 2010 compared with June 2009 recorded a rise of 6.2%. The previous year the MPI decreased by 4.8% 

Comment and Analysis 

I have presented a range of economic statistics to see what they tell us about the underlying state of the Greek economy and it is not good news. If we treat the annual fall in Gross Domestic Product of 3.5% with some caution we are still left with an unsettling 1.5% quarter on quarter fall. Adding to the unease is the fall in retail sales which is somewhat dramatic in volume terms which does not bode well either. If we move onto the issue of economic competitiveness which is one of Greece’s existing problems and a cause of her current malaise then an annual inflation rate of 5.5% combined with import price inflation on the same basis of 6.2% will only make it worse. 

These statistics will have been influenced by some of the Greek austerity moves but there is more to come as the year progresses. So I am afraid that things in terms of economic growth and unemployment are likely to worsen in the second half of 2010 in line with predictions I have made before. If we return to the recent claims of Greek politicians and officials we are again in a situation where official claims have a mis-match with reality. I wish I could report happier news. 

There is also a second order effect going on and this is something within the euro zone itself. An issue within the euro zone is differing degrees of economic competitiveness between individual members of which perhaps the polar extremes are Germany and Greece. On a quarter on quarter basis the Greek economy has just shrunk by 1.5% whilst the German one has expanded by an extraordinary 2.2%. Even since the euro zone came into being this was likely sooner or later to become a big issue as for example under it they have the same interest rates and monetary policy. At the moment it is plainly an issue and will lead to disagreements. Put yourself in Frankfurt in the European Central Bank’s office and imagine you are setting monetary policy which example do you follow and act on? Not easy is it? 

One signal of Greece’s position is her ten-year government bond yield. Recently I have commented on falls in government bond yields around the world such as the US,UK,Germany, Japan and even other countries such as Spain which were getting grouped with Greece inside the euro zone. However Greece’s ten-year yield is 10.56% with no signs of a fall. 

Germany and her extraordinary economic growth 

The figures released this morning were rather extraordinary so I will repeat them, 2.2% economic growth on the quarter. On an American annualised basis they would be reporting growth of virtually 9%! This is a record for economic growth in reunified Germany and puts even the UK’s reported 1.1% into perspective let alone the recent American figures. The previous quarter was revised up from 0.3% to 0.5% as well. Should these numbers survive the revision process then Germany’s export locomotive is powering ahead. These were the initial or flash estimates so some caution is required as these are always based on incomplete data however it would require quite a downwards revision to make them look anything but good.

Another related issue which has emerged in the last few days is that the Eurostat the European statistics agency has recommended that the bank debts of nationalised banks should be included in Germany’s  debt-to-GDP ratio which would rise from 75 to 90 per cent when this happens. In essence it would now include the debts of Hypo Real Estate. In the short-term this news will be  probably be given much less significance than the growth news which may make some wonder at the timing. 

Comment and Analysis 

These extraordinary growth figures from Germany are obviously good for her but they do raise a problem. One of the contributors to the world’s current economic problems was the existence of global imbalances and this week has seen a rather familiar refrain of increasing imports in the US followed by signs of export strength from Germany, exacerbating yes you have guessed it a global imbalance. Such reports would not be out-of-place in the run-up to the credit crunch. I wrote about this concerning trend earlier this week and it is an issue as we seem to have returned to pretty much the same situation so quickly. 

Another theme I have commented on is the divergence between equity markets and government bond markets. I have another divergence for you to consider as  growth of 2.2% on the quarter does not go with a German bund ten-year yield of 2.42%. An investment in the German economy if you could invest in such a thing would nearly have returned one years interest in one-quarter. So there is a divergence or mis-match here too and such divergences are mounting. 

Within the euro zone itself there are clear signs of economic divergence. I have already mentioned the difference between Germany and Greece. However the overall growth rate for the euro zone was 1% in the second quarter of 2010 which would have been pulled upwards by the German number. Moving onto other individual comparisons we find economic growth rates for France at 0.6%, Italy at 0.4% and Spain at 0.2% on the quarter. These do not make a one size fits all monetary policy and indeed exchange rate simple and we can expect more friction and divergences going forwards I feel as there are contradictions here.If you take the principle that Eurosat appears to have established that so called bad banks established out of nationalised lenders should be included in national debt calculations and national debt to GDP calculations then there are clear implications and issues for other countries such as the UK  (Royal Bank of Scotland?), Ireland and Spain.

On a lighter note

Whilst writing todays blog a journalist came on the radio station I had on in the backgound and annouced he could explain Princess Anne’s apparent popularity in two words. These were “sheer hard work”.


16 thoughts on “Greece’s economics statistics disappoint whilst Germany booms, more economic divergence in the Euro Zone

  1. You appear to treat the 2.2% growth figure as nearly sacrosanct. Following the trend, as you usually prefer with economic data, the actual figure could be high but could it really be historically high?

    So all countries who are in a better situation than Spain are growing and Greece is still shrinking. Disappointingly though eurostat seems not to have the data on the countries in between. I would argue Ireland has especial interest as they are leading the way with deficit reduction.

  2. Hello Shaun,

    Thanks for another excellent post on Greek economy. I just have 2 comments and 2 questions to add:
    1) Decrease of retail sales (especially non food and supermarket ones) have been one of the first signs of a crisis here in Greece. We had started as early as winter 2008 to see some stagnation and slight decline of turnover. Also Jan-Jul 2009 has been quite a bad period so i think that if you compare the first 7 months of this year vs couple of years ago the decrease can probably be around -10% – -15%.
    2) It has been very evident since May that things in the real economy and consumption are going from bad to worse. Also it has been recently revealed that the state’s tax revenues vs July 2009 have been lower by around 9%. And on the other hand public expenses in July have increased!
    a) Do you see any serious economic or political action taken by the troika in the next few months? Will they just continue praising Greece while the situation deteriorates more?
    b) Can Greece’s likely future failure to meet her economic and public reform targets pose a threat to receiving the entire amount of 110bln support package?

    Have a nice weekend!

    • Hi Angelo
      Thanks for the info and thoughts. As to your questions I think that the answer to a) is no and yes. I think that the political imperative will outweigh the numbers and reality unless something which cannot be glossed over comes up. Let’s face it EU officials pronouncements during this period have often ignored and indeed defied reality! As to b) I think probably not in the short term but as time goes by other countries could join Slovakia and say no to the aid package, or the IMF could withdraw support (take the blame) and lead to the euro zone “reluctantly” following it. However I expect them to try and bend the facts in such a situation,so we could end up with a situation like in the spring of this year when events dictate to a euro zone which responds too slowly…They have not shown many signs of learning from this experience.

  3. If this turns out to be unsuccessful as you suggest, the Greek people will get rid of IMF/EU/government one way or the other, sooner or later. For the time being, they are relatively calm and silent, they accepted the austerity and they have adopted a ‘wait and see’ attitude. August is vacation time in most of south countries (including France), no-one talks politics and economics.

  4. Hi Shaun,

    speaking of Greece, today’s Kathimerini at:
    refers to an IMF report, which I found here:
    the relevant item being the top line of the table on page 22.
    So, the total sum Greece needs to borrow for the next five years is estimated at 313 billion euros and change.
    The Kathimerini report comments that perhaps Greece will get more money down the road (since 313 is a number somewhat larger than 110), or it will default.

    Some time ago, the Kathimerini reporter with the apparently good information sources had an article suggesting that there were a few safety valves to avoid a default. One was giving Greece more money, another was delaying the repayment of the debt (of the bailout package) to EU-IMF. A third, and most interesting one if I understood it correctly, was that the eurozone support vehicle (the 1 trillion thingy) would buy existing greek government bonds in the market and resell them to the greek government at their market (and low) price. Then Greece would actually get the benefits of a haircut without defaulting.


    • Hi John
      Thanks for the links.Whoever is the source at Kathimerini they are often on the ball. The numbers pose a few questions and it is interesting to see a breakdown. There were doubts from the beginning as to whether Greece would be able to repay the money and whether it would end up as a permanent loan. I remember suggesting that the creditor nations should treat it as a five year loan or more and hedge it against their bond yields of that maturity as the idea of a 3 year repayment never seemed particularly realistic to me. Looking at the actual numbers makes it look even less realistic to me.

      I also enjoyed the breakdown on the page such as the line marked other,perhaps it was the only way the numbers added up!

      The EFSF strategy has various issues I think. Would the markets let them do it? For example some banks have avoided the implications of full exposure to the stress tests by claiming they are holding Greek bonds to maturity doing this would make the banks declare a loss. Also other countries might join Slovakia and argue that there are moral hazards in the package ( for those unaware Slovakia backed the EFSF but refused to back the Greek aid package).

    • Hi Mr.K
      I think we are returning to a phase where worries about the peripheral nations in the euro zone are mounting again. We had a period where they were ignored and for example their government bond yields dropped. However more recently they haven’t followed the recent drop in yields and in fact in some countries are now rising again whilst gilts bonds and treasuries keep posting new lows. I am not sure how far the views I expressed on Greece a.k.a its not going that well have stretched but I think that message in spreading. There was not so good news on Ireland and Spain too in the week that in a busy week I did not get round to analysing on here.
      I also think that your previous question came into play as in many others will be asking the same question. As I mentioned in my article yesterday that includes me! As to an answer there are differences between the structures of German banking and the rest of Europe and to add a further layer of complexity the bad banks/asset protection schemes in Europe are different too. I have read Eurostats letter to Germany’s statistics authority and it seems to pose questions of principle which to my mind could apply elsewhere but it is rather obtuse in its language so I will reply more fully when I get a full grip on it.Taking the principle further could hit Ireland’s NAMA or the UK’s Asset Protection Scheme which covered some £282 billion of RBS assets but there are possible get -outs as for example RBS is 68% or 84% taxpayer owned depending on how you count it and does that count as nationalised? In terms of economic effect I would say yes but would a bureaucrat/official? We have seen more than a few fudges this year.
      Although mind you if you start applying such principles what about Fannie Mae and Freddie Mac?

  5. Freddie and Fannie have US Gov’t guarantees; their combined portfolio is approximately $6 trillion; if I’m correct, the Feds have pumped about $75 billion into these ratholes. Before this is all done, total losses for Funny & Fraudy along with FHA will exceed a trillion, of which we serfs will be paying approximately two thirds. I’m rather glad the global bond markets have their stare fixed on Club Med at the moment because when their gaze rests upon us, they’ll discover we’re in roughly the same shape as Spain.

  6. I have several comments:

    The First Comment is on import inflation. Frankly the Greek Government should immediately put import barriers on a number of products. Yes simply say 40% less oil and tell the people to live with it by setting up a rationing system. But that I know will never happen. These organizations should never have been set up. Now all that $7 trillion or more in debt will be applied to every many, woman and child in America.

    The Second Comment is on the Eurostat Announcement: Tyler Durden relates the German Die Zeit report that the EU Eurostat Has Ordered Germany To Count The Holdings Of WestLB And Hypo Real Estate As Government Debt. And Mr. Durden questions, will the onboarding of bad debt to the German Sovereign Balance Sheet, lead to the nationalized RBS and its $168 billion in debt, be added to UK Sovereign Debt? And he relates: “Then there is a whole slew of other banks in the pipeline in Europe that are full of trillions in toxic debt: will the sovereign hosts be able to onboard this debt? Most importantly, what happens to our administration’s adamant claims that Fannie and Freddie’s $6+ trillion in debt should not be counted as part of total Federal debt. We are confident that unless this decision by the EU’s statistics office is overturned, it will likely set off the next leg in the sovereign debt crisis.”

    I state that if the directive of Eurostat for nationalization of bank debt as sovereign debt is upheld or obliged, then this is a defacto federalization of the European Union, and loss of national sovereignty, which establishes Eurostat as a regional fiscal and monetary authority in the Eurozone, definitely giving new meaning to the term European Economic Governance.

    In related article, William Poole, former St. Louis Fed President, in New York Time writes Say Good Bye To Freddie And Fannie. Yes I would like to repudiate all that debt, but that will not happen.

    Third comment is on you relating the Greek sovereign ten-year yield is 10.56%. This implies to me that the banks are both ill-liquid and insolvent and that there is probably no lending going on.

    Fourth comment is that the world entered into Kondratieff Winter August 11, 2010 as currencies were sold off against the Yen, resulting in a sell off of Stocks and Commodities. US Treasuries, Municipal Bonds and State Bonds, rose taking Total Bonds, higher the week ending August 13, 2010; these are peaking out and will be joining the other financial products tumbling lower together, while gold has risen to be the Sovereign Global Currency.

    Fifth commemt is that I believe in the near future, Credit Bosses, what I call Credit Seigniors, will be appointed to issue and manage credit as the debt bubble, that is the bond bubble, implodes and the economy shatters.

    Here in the US, I envision, that out of a coming credit crisis, where there is no credit available, a Financial Regulator, will exercise Discretionary Governance, and announce a Home Leasing Program administered by the banks on their REO properties and those of Freddie Mac, Fannie Mae and the US Federal Reserve.

    Mortgage lending and securitization of loans will cease, and leasing of homes will be a public private partnership cooperative endeavor. Companies that have done servicing mortgage-backed securities, such as Anworth Mortgage Asset Corporation, ANH, will quickly disappear from the economic landscape, as mortgage bond funds such as Goldman Sachs Mortgage Bonds, GSUAX, tumble in value.

    I also envision that this Credit Seignior, perhaps in public private partnership with American Express, AXP, and Capitol One Finance, COF, will provide seigniorage for credit. He will provide finance and issue credit mostly to those companies which serve strategic national needs.

    In Europe, I see a new role for the President of the ECB. I envision that in response to severe credit contraction and banking ill-liquidity, that he also will be Credit Seignior, as he accepts sovereign and other debt and issues credit to Eurozone member banks thereby keeping some degree of money liquidity flowing.

    When the debt bubble bursts, the world will see “the end of credit” as it has traditionally been known, where credit comes from the seigniorage of sovereign nations issuing sovereign debt and financial institutions securitizing bonds.

    Governments will become seignior, that is they will exercise seigniorage and become the first, last and only provider of credit. Then only food stamps and strategic needs will be financed.

    Sixth comment is on a comment which relates: “And on the other hand public expenses in July have increased!” My God, how can that be? I thought Greece was under austerity measures, and these were being applied to keep that kind of thing from happening.

    • Hi Drf
      We are getting a few of these signals this summer or at least people are reporting them. Wasn’t the last one the death cross? I think that the publication of such signs is a signal of the fact that it is in the human nature to try and explain things by patterns. Lets face it even our method of vision operates on such a system. Sometimes of course they do work but I tend to think that they are most likely to work when the number of people watching them is low in the same way that Goodharts law operates.

      Also I think that the current situation where there are plainly many things wrong unsettles people. An extreme version of that is astrology and here is a link to something on that front that a friend sent me and those of a nervous disposition would do well not to click on this link! However I am by no means a follower of astrology except to say I am sure events like solar flares probably do have an influence on us.

      • Hi Shaun,

        Thanks for your reply. Using Astrology though, in place of rationality and real data – that’s a whole different ball game? Scary stuff though.

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