This week has seen some familiar developments in the economic crisis that has enveloped Greece in the last few years. Yet again we see that optimistic reports including that horrible phrase “on track” -which invariably is a signal for economic disasters to come-are replaced by a much grimmer reality. This creates all sorts of finance problems because the numbers underlying the bailout for Greece depend on the rose-tinted forecasts which are made and accordingly they shatter as the economy weakens. So yet again Greece finds herself on the brink and the phrase deja vu does not do justice to the regularity with which this keeps happening. This may be great for adrenalin junkies but it is certainly no way to run an economy.
If we take Kylie Minogue’s advice and “Step Back in Time” to June 2011 we can see a clear example of what I mean. Here is the Medium Term Financial Strategy of the Greek government.
GDP is projected to start flattening up in 2011 (-3.5%) with recently announced provisional estimates for the first quarter showing an increase in GDP compared to the previous quarter (+0.8%, Q/Q-1)…….Thus, a positive carry-over is projected for 2012 (resulting to a growth rate with a positive sign, namely 0.8%), with growth gradually accelerating to reach 2.7% in 2015
If you look back I questioned the numbers for the first quarter of 2011 at the time and pointed out that they were likely to be misleading. However the MTFS made no such allowance and projected a rose-tinted forecast off them.
Meanwhile in the real world
From the Greek statistics office
GDP (market prices) for 2011, calculated at 2010 prices, amounted to 206.4 billion € compared with 222.2 billion € for 2010 (7.1% reduction).
So the Greek economy shrank at double the rate expected. And sadly there was some “positive carry over” but in the opposite direction as compared to 0.8% growth in 2012 we in fact so far have seen it shrink at an annual rate of 6.3% as of the second quarter. As I shall show later such evidence as we have received since indicates continued sharp falls in economic output. Maybe even sharper ones.
Looked at like that it is no surprise at all that the Greek budget is in a mess. One of the issues in targeting a budget deficit is that it is a residual of two large numbers which are spending and taxes with the latter subtracted from the former. We can see that the economic collapse versus the forecast will reduce tax revenue and raise spending meaning that the budget target gets hit on both sides. Even worse the proposed solution to this is more cutbacks and austerity which weakens the economy further and the whole cycle takes one more turn. This is analogous to the image of the wheel of fortune that King Lear rails against on his blasted heath.
If we move to the projected future now we see that it too has seen a heavy downgrade. The Greek government yesterday forecast that her economy would shrink by 4.5% in 2013. This number is chilling enough but if we compare to “growth gradually accelerating to reach 2.7% in 2015” we see the scale of the disaster which is unfolding here.
The consequence of this is that the measures of Greece’s public-sector deficits and debts have moved heavily against her. We see that she “needs” another 13.5 billion Euros of austerity to stay “on track”. We also see that the promised reductions in her national debt to GDP data have disappeared as this is now forecast to reach 189% next year. Remember the debt haircut which was supposed to solve this problem? The so-called Private Sector Initiative was supposed to reduce this particular ratio to 120% in 2020 and instead we find it ballooning away again.
Accordingly it is not a surprise that Greece is asking for a two-year delay in achieving the targets it has been given. The catch is that like pulling a tooth slowly it is likely only to spread the same pain over a longer time period. It will for example leave her even more indebted and on this extra debt she will have to pay interest and this beast of burden threatens to overwhelm her. The latest troika report is that an extra 30 billion Euros of funding will be required for Greece but what is pointed out all too rarely is that she will have to pay interest on this funding and so she becomes ever more indebted and even further away from a sustainable solution.
What is the latest information on the Greek economy?
We see that the pain continues. From the Greek statistics office.
The retail trade volume index, including automotive fuel, decreased by 9.2% in August 2012 compared with August 2011.
When we consider that this is on the back of previous substantial falls we begin to see the scale of the economic collapse being signalled here. the underlying number for the volume index is now 76.6 compared to a base of 100 in 2005, so well below the levels of seven years ago. The sharpness of the contraction is illustrated by the fact that as 2010 began the index was at 105.7.
This morning has seen the release of the most up to date series we get as the Markit purchasing managers index or PMI has been released. We see that the crunch is deepening as on a scale where numbers below 50 indicate an increasing contraction Greece has fallen from 42.2 in September to 41 in October. In her circumstances a deeper contraction is exactly what is not needed. If we look at the detail of the report we can glean more about the current state of play in here economy.
October data showed another steep decrease in the level of manufacturing output in Greece, which reflected not only lower demand in the domestic economy but also a further marked drop in export orders………In fact, the amount of new work received from foreign clients fell at the steepest rate since January 2009
As exports had been about the only bright spot this is very unwelcome news. Also we see that a more troubled area looks about to get worse.
Employment meanwhile fell at a faster rate, with firms possessing an increasing degree of spare capacity……
We were reminded only yesterday by Eurostat that the unemployment rate in Greece was 25.1% in July and the report highlighted above suggests that this will continue its apparently inexorable rise.
What we see here is an economic disaster which has as a main feature the fact that the main players have learnt nothing at all. All they wish to do is keep applying the same medicine a bit like medieval doctors applying leeches to a seriously ill patient. Either they are not very bright or they do not care much about the consequences. The saddest part of this is that it did not have to be this way. Regular readers will be aware that I have argued since the beginning of the Greek economic crisis that she needs complete reform combined with default and devaluation. Supporters of the official strategy have thrown both mud and stones at this view saying it would cause a disaster but of course it is their policy that has caused the disaster which has been inflicted on Greece. I hope that they will be called to account for their actions.
The Financial Times Alphaville section has quoted some work today from Gabriel Sterne of Exotix which nicely illustrates what has happened. The emphasis is mine.
The IMF forecast for 2013 nominal GDP has been reduced by an astonishing 22% in the two years since Nov 2010. In our opinion it is this unanticipated decline in economic activity that has surprised the Fund, and driven a stake through the heart of the programme. We would be interested to hear if someone else knows of a bigger or more significant 2-year forecasting revision for an industrialised economy.
Well does anyone?
The full article can be found here. http://ftalphaville.ft.com/2012/11/01/1241521/greek-government-acquires-more-realistic-crystal-ball/