Welcome back to those of you like me who have returned here and hello to new readers. Today I intend to analyse a regular subject of the credit crunch era which is the economy of Greece. The scale of the economic destruction that has taken place is of the order that is called a great depression when we refer to the 1920’s and 30’s. This is completely the opposite of what was promised back in April and May 2010 when the bailout programmes for Greece began. Believe it or not the Greek economy was supposed to return to growth in 2012 (1.1%) and then grow at over 2% from 2013 onwards. Even worse the unemployment rate was supposed to rise to 14.8% and then fall on a similar timescale as opposed to surging higher and higher. This was accompanied by those in charge of the policy such as French Finance Minister Christine Lagarde calling it a “shock and awe) move. Yes it has turned out to be but not in the way she or they intended as the shock has been at the stupidity employed.
So let us move forwards and see what signs of what has been called “Grecovery” there are.
The latest economic growth figures showed that whilst Greece has not yet even stabilised its position there is some hope that it will happen soon.
in the 2nd quarter of 2014, the Gross Domestic Product (GDP), in volume terms, decreased by 0.3% in comparison with the 2nd quarter of 2013,
If we look backwards for the scale of the fall we see that economic output in Greece has fallen by 24% since the second quarter of 2008. I also note that the application of the “shock and awe” plan accelerated the fall with the annual rate of decline of the Greek economy peaking at 9.2% in the final quarter of 2010. I argued back then that such a strict programme needed a lower exchange rate to ameliorate things but of course the official view involved Greece remaining in what for it has been the straight-jacket of Euro membership. I will leave it to readers to decide whether the optimistic official forecasts were incompetent or deliberately misleading.
Such a contraction has effects in a multitude of areas including the one below. From Kathimerini
Greece’s population shrank by 17,660 people last year as deaths outpaced births, according to the Hellenic Statistical Authority (ELSTAT).
Those numbers do not include emigration.
Ordinarily a decline in economic activity on such a scale would involve a strong bounce back in the recovery phase. Economists call this a V-shaped recovery where the economic weakness seedcorns the subsequent recovery. The problem is that not only has this not yet happened but there are worries even now that it will happen.
Last week saw the latest purchasing managers survey for manufacturing released.
September saw slight decreases in both
manufacturing output and new orders, reversing the
gains seen mid-quarter. This renewed weakness
contributed to further job losses in the sector,
As you can see the hopes of an improvement that took place in the summer seem to have been extinguished for now. We are now looking for any signs of growth as opposed to a V-shaped rebound. Also with the elevated level of unemployment (26.6%) Greece does not need further job losses.
There is also an economic sentiment indicator compiled by the European Commission and this showed a similar decline in Greece. After rising to a peak of 104.1 in June it moved lower through the summer and dropped more sharply to 99.3 in September.
If we move wider and look at prospects for the Euro area and hence Greek exports we do not get a lot of cheer either. The weak economic outlook was added to by this morning’s update on the state of play of the retail sector in the major Euro area economies.
Consumer spending in the euro area looks to be
on the downturn, with the latest retail PMI figures
showing sales falling for the third month running.
Furthermore, September’s decrease in sales was
the sharpest for almost a year-and-half as rates of
contraction gathered pace in France and Germany
Another Euro area recession would be exactly what the Greek economy does not need! Remember 2014 was supposed to be the year of recovery for the Euro area.
What about wages?
This is an issue which concerns much of the developed world right now. However Greece has seen moves which have been particularly severe. If we take 2008 as our benchmark of 100 then in the second quarter of this year wages in Greece were at 82.5 (seasonally adjusted). Whilst this may seem bad enough I am afraid that the situation is even worse when we look at what has happened to real wages. This is because whilst Greece now has disinflation it had an inflationary episode mostly driven by the rises in indirect taxes applied to tighten austerity and raise revenue. So since 2008 prices have risen by approximately 8%. If you were wondering why Greek domestic demand has collapsed try buying products which are on average 8% more expensive with wages some 17.5% lower!
The latest numbers show some hope that the declines at least have eased.
The seasonally adjusted Index of wages of the 2nd quarter 2014, recorded a decrease of 1.0% compared with the corresponding index of the 2nd quarter of 2013,
But as to any rebound we will have to wait and see.
What about the trade balance?
The section above describes what is called an internal competitiveness adjustment of an extreme level. I hope that it is as extreme as I will ever see. The official theory is that such a wage adjustment will make the Greek economy much more competitive and it will thereby be able to increase its output and production. Accordingly one looks to numbers which would demonstrate this of which the most obvious are the trade figures. the current account balance was supposed to move into surplus in 2012 and the see a succession of rising surpluses. One would hope to see a better export performance and some import substitution so let us take a look.
The deficit of the Trade Balance, for the 7-month period from January to July 2014 amounted to 12408,6 million euros (16797,3 million dollars) in comparison with 11146,8 million euros (14475,5 million dollars) for the corresponding period of the year 2013, recording an increase, in euros, of 11,3%.
So trade is not improving in 2014 as far as we can tell and in fact exports of goods have fallen by 4% on 2013. Now this is not the full picture as Greece for example has substantial export receipts from its services sector particularly tourism. On a wider current account measure Greece did have its first surplus in 2013 since 1948. So it would appear that any further balance of payments improvements will have to be driven by tourism and those with Greece’s interests at heart will hope for more of this. From the Bank of Greece.
As regards travel spending by non-residents in Greece, a year-on-year increase of 13.8% was recorded, reflecting a 20.8% rise in non-residents’ arrivals.
Today has seen a new draft budget published for Greece and I note that much of the media is reporting it along the lines that 2015 will be a second year of growth for Greece. I am sure you have spotted that it is not yet certain that 2014 will be one of growth and the outlook is getting more not less cloudy. There has been no shortage of official economic forecasts telling us that Greece will return to economic growth next year! This is invariably accompanied by a forecast that the national debt will reduce as a proportion of economic output. This time the forecast number is 168%.Such forecasts are usually accompanied by the phrase that has become a harbinger of doom “on track” and yes it is back. Indeed if we believe the Deputy Finance Minister it will be a future world of apple pie and ice cream. From the Associated Press.
The country is entering a long period of sustained economic growth rates and primary surpluses that will bring growth in employment, reducing unemployment and improving living standards for all citizens,
Meanwhile the actual picture seems much more problematic to me. Yes some growth seems likely mostly in truth due to the fact that the decline was so large! Indeed the surprise and indeed anti-achievement was to avoid this so far. But with the outlook in the Euro area weakening the bright spots in the Greek economy may struggle to gain much traction. Also what if this is as good as it gets and we see what is called an L-shaped recovery or god forbid a further contraction?