Much is happening in Greece at this time and this morning has seen one of my biggest fears about the state of play in its economy reinforced. Not the plunge in the stock market in Athens which I will come to later but something which I have to confess was eye-catching this morning and even in the grim circumstances prevailing in Greece right now still had some shock value. From the Markit Purchasing Managers Index or PMI for manufacturing.
July saw factory production in Greece contract sharply amid an unprecedented drop in new orders and difficulties in purchasing raw materials.
If we consider the economic depression that has been raging in Greece then one is immediately troubled by the phrase “unprecedented drop” as in such circumstances one fears the worst. Also I note that the troubles in the banking sector are coming home to roost in “difficulties in purchasing raw materials” Back on the 27th of July I analysed this issue.
This of course is no way to run a banking system as we wonder how the credit supply from the Greek banks has been affected or not to put too fine a point on it, if there is one. My late father regularly used to complain that in UK recessions his business not only found it difficult to get new credit but saw existing lines reduced or withdrawn. Imaging the effect of such moves should Greek bankers prove to be like British ones!
Back then the newspaper Kathimerini was also expressing concerns.
“The banks are in deep freeze but the economy is getting weaker,” said one official, pointing to a steady rise in loans that are not being repaid.
Today we have seen a clear impact on the real economy.
The manufacturing outlook
The spot PMI reading was as low as I can recall seeing in this phase of the crisis.
The headline seasonally adjusted Markit Greece Manufacturing Purchasing Managers’ Index® (PMI® ) – a single-figure measure of overall business conditions – registered 30.2, well below the neutral 50.0 mark and its lowest ever reading.
We have become used to considering the low 40s as very weak and the high 30s as even worse but this breaks new ground for the Greece crisis. Not an outright low as Spanish manufacturing hit 28.5 in December 2008 (h/t Edward Hugh) but a low for a 16 year series for Greece
If we look into the detail the misery continues to build up.
Record contractions were registered for almost all variables monitored by the survey, including output, new orders, employment and stocks. There was also a record lengthening in suppliers’ delivery times.
Tucked away in the detail was something that you would not expect after all the supposed “internal competitiveness” gains ( otherwise known as wage cuts) in Greece and the generally lower level of the Euro.
A sharp and accelerated decrease in new export orders (also a series record) added to the overall reduction in new work.
The internal competitiveness gains were supposed to reinvigorate the Greek economy especially in price competitive sectors of the economy like manufacturing.
The downturn in manufacturing in July also has consequences for a country with an already elevated unemployment rate of 25.6% (April).
July’s survey signalled the steepest drop in factory employment ever recorded during the 16-plus years of data collection. The decrease was the fourth in successive months,
The official data
If we look back we see that there had been signs of trouble but nothing on the scale indicated this morning.
The Production Index in Industry (IPI), according to working day adjusted data, in May 2015 compared with May 2014 recorded a decrease of 4.0%. …….In the 5-month period from January 2015 to May 2015, according to working day adjusted data, the average rate of change of the IPI was 0.8%.
If we drill down further to the manufacturing section then 2015 had opened in better form with the year to May up 3.7% but May also saw a dip.
Manufacturing production decreased by 2.7%.
That left the index adjusted for working days and seasonality at 90.3 where 2010=100. If we look back to the 2005 level then we are just over 25% lower. Putting it in simpler terms it is a clear economic depression.
What about the banks?
The impact of the capital controls on the flow of credit to Greek manufacturing is clear from today’s PMI report.
Panel members commented on the impact of capital controls on demand…… Panel member reports indicated that companies commonly faced difficulties sourcing inputs due to capital restrictions and the limited availability of some items.
This seems to have been even worse for export finance.
Panellists mentioned in particular the difficulty in receiving items from abroad.
I would not be surprised if foreign companies were asking for cash on delivery rather than offering any form of credit as might be normal.
Whilst in some respects there has been a loosening of the capital controls noose around the neck of the Greek banks via some 1.8 billion Euros of extra liquidity (ELA) from the European Central Bank there are other issues. This morning’s opening of the Athens stock exchange brought this. From Bloomberg.
Piraeus Bank SA and National Bank of Greece SA sank 30 percent, the daily maximum allowed by the Athens bourse.
EFG Eurobank was better as it was only down some 29.8%! However if we move on from gallows humour we are reminded that such an environment must continue to restrict the ability of the banks to provide much-needed finance and credit for Greek industry and households. Meanwhile the rescue cavalry seems to have found itself locked in its barracks without a key. From Sigma TV.
The goal of the Greek government and the Bank of Greece is to, during 2015, finish recapitalising banks……According to press sources, the first stress tests (AQR) have already started and in October they expect them to finish.
Backing this up have been falls in the wider stock market with an opening drop of the order of 22% for the Athens General Index followed by a minor bounce to 18% lower on the day.
In terms of scale then manufacturing has declined in importance in what is considered to be the first world. So we need to put today’s numbers in that context. However they do give us a steer into what the underlying conditions are in the Greek economy right now and as we do so we find ourselves singing along to the Kaiser Chiefs and Lilly Allen.
Oh my, god I can’t believe it
I’ve never been this far away from home
And oh my god I can’t believe it
I’ve never been this far away from home
The current government has been in charge over a period where the economic depression affecting Greece has returned to the foreground. It has been a particular anti-triumph of those in charge in Greece ( some combination of the government and the institutions/troika) that even a brief flickering of improvement was soon smashed as the gears clunked back into reverse. They have managed this just as conditions have improved elsewhere in the Euro area in response to both a lower oil price and a lower exchange-rate for the Euro itself.
For clarity as people regularly ask here is a break down by Mckinsey in 2012 of what Greece does manufacture. Food processing is the largest element at 30% of Gross Value Added (GVA) followed by heavy industry at 26% of GVA and beverages at 10%.