Sadly the summer weather has departed southern England for now but it does not mean that we have to stop a wry smile at some summer fun. What do I mean? Well take a look at the official reports we have been provided with in the past 24 hours.
First we received this from the Greek statistics office.
Available seasonally adjusted data# indicate that in the 2nd quarter of 2015 the Gross Domestic Product (GDP) in volume terms# increased by 0.8% in comparison with the 1st quarter of 2015,
Then early this morning the Germans replied.
The German economy continues to grow. In the second quarter of 2015, the gross domestic product (GDP) rose 0.4% on the first quarter of the year after adjustment for price, seasonal and calendar variations.
So in quarter on quarter terms Greece grew at twice the rate of Germany! How is the German reform program going? More seriously it does in a way reinforce my subject of yesterday because Germany has grown at 0.3% and now 0.4% in 2015 so far which when you consider the favourable background of lower oil prices and expansionary monetary policy is hardly racing away. Thus we mull one more time what it would be doing if it had its own (much stronger) currency?
As we look deeper we see that it is likely that Greece has outgrown Germany in 2015 so far as it revised its first quarter from -0.2% to 0%. So we are down t the decimal points and let us hope it was not a draw. English football fans know that draws with Germany lead to a loss on penalties.
What happened in Greece?
I explained the position on the World Business Report on the BBC World Service yesterday evening.
http://www.bbc.co.uk/programmes/p02ychb6#play
As there is no break down of the data I gave some thoughts on what has been taking place. In essence white goods and cars were purchased as the banking crisis began to fire up and that looks to have provided a boost to consumption. Also there may have been a trade effect if the finance issue led to a drop in imports which would boost the recorded trade balance and hence GDP. We do know that imports dropped by 12% in June compared to a year before.
There was a reinforcement of one of these ideas earlier this week.
The Hellenic Statistical Authority announces that in July 2015, 8.181 road motor cars (both new and used from abroad) were put into circulation for the first time, recording a 23,9% decrease compared with the corresponding month of 2014.
This contrasted substantially with the pattern for the year so far shown below.
During the period January – July 2015, 74.603 road motor cars (both new and used from abroad) were put into circulation for the first time, representing a 18,4% increase compared to the corresponding period of 2014
So we see that there was a surge of car buying in the first half of 2015 which fits the theory that relatively well-off Greek were shifting from bank deposits to real goods and of course in this instance goods which are mobile by definition! A type of store of value when there were genuine fears about what might happen to bank deposits.
Why then and not in July? It may not have been possible in July as the bank shut downs and restrictions started on June 28th and also we are likely to be seeing people in a position to act ahead of events. You may note that the July numbers raise real fears about what is happening in this quarter in Greece. Back on the 3rd of this month I pointed out that Greek manufacturing had been hit hard.
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.
What about debt sustainability?
This relates to an issue I raised at the end of the radio interview linked to above. Whilst a rise in GDP seems welcome compared to the Greek national debt burden this fades as we see how it has taken place. This is because the rise in output is being driven by a fall in prices. This is very welcome in terms of buying goods and services as you can buy more for the same outlay. However against a fixed debt burden we see that Greece has a nominal or if you like Euros in your pocket GDP which fell by 0.7%. If we compare to a year ago nominal GDP in Greece is virtually unchanged (0.1% up) whereas we know the debt burden continues to mount and gets ever more unaffordable.
Putting it another way this is why central banks like inflation! It boosts nominal GDP and helps with debt burdens most of which are not linked to inflation. This is an underlying reason why the ECB is undertaking QE on a large-scale now.
What about the new deal?
Slowly such thoughts (the debt is unaffordable) are ricocheting around the institutions (ex-Troika). The European Commission has linked online to an IMF statement which contains this.
once the steps on the authorities’ program and debt relief have been taken,
According to Bloomberg their minds have been focused by this.
Greece’s obligations will peak at 201 percent of gross domestic product next year,
Of course they may yet make a dogs dinner of all of this.
Today’s bailout vote
The Syriza government has managed to get the bailout bill through the Greek Parliament albeit at the price of the fact that by shedding members it no longer has a majority government. However we move ever nearer to the next deadline which is the repayment of a 3.2 billion Euro bond owned by the ECB which Greece does not have the funds to repay. So as Muse put it we are in familiar territory.
once the steps on the authorities’ program and debt relief have been taken,
What about the implications for Greece?
I have been very critical about these and they provide a counterpoint to the latest glimmer of sun through the clouds provided by the GDP data for 2015 so far. In essence it all boils down to this. From the European Commission.
the authorities will accordingly pursue a new fiscal path premised on a primary surplus balance targets of -¼, 0.5, 1¾, and 3.5 percent of GDP in 2015, 2016, 2017 and 2018 and beyond,
The “and beyond” rather echoes the famous phrase of Buzz Lightyear. The fundamental issue here is that we know what imposing such austerity does to Greece as each time it has been applied it has extended its economic depression and we can paly another section of that Muse song.
I think I’m drowning
Asphyxiated
I want to break the spell
That you’ve created
Comment
Briefly Greece finds itself along with Spain and probably Ireland in the van of the Euro area growth pack. However if we allow for the expansionary monetary policy and the fall in the oil price the Euro area disappointed in the last quarter.
Seasonally adjusted GDP rose by 0.3% in the euro area (EA19) during the second quarter of 2015……Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.2% in the euro area
As we look forwards for Greece we see that there are disappointments ahead as we fear what the economic growth figures for this quarter will bring. Also the European Commission debt forecasts rely on economic growth returning otherwise the 201% as a national debt to GDP ratio will be far from a peak. Remember when they told us it was on its way or “on track” to 120%?
If the Euro did not exist what would the economies of Greece and Germany be doing right now?
Notayesmanseconomics's Blog 
There are two long-term possibilities; and debt relief is by far the cheaper.
The other, eventually, is the physical occupation of Greece, in order to protect the integrity of EU borders, and to enforce social order.
Hi therrawbuzzin
The powers that be in Europe are not very keen on military intervention on any scale these days. They did not overtly intervene in Ukraine and I note that the RAF often covers the Baltic states. Also the Italians might be worried about what happened last time they tried it! That is before we get to the obvious issues of German soldiers occupying at least part of Greece….
http://www.raf.mod.uk/news/archive/families-day-in-estonia-with-the-typhoon-fighter-force-03082015
How long does it take to get from Kos to Calais?
The difference between Greece and Ukraine is that Ukraine won’t flood the EU with costly refugees, the number of which is growing exponentially:
.http://www.ft.com/cms/s/0/145bb3b0-3d03-11e5-8613-07d16aad2152.html#axzz3is1ecVMJ
Shaun,
Little growth in France and with Chinese devaluation only response for ECB is more QE for longer perhaps?
Hi ChrisL
Yes the way that the Euro has edged higher to 1.11 versus the US Dollar and of course has risen this week against the Yuan/Renminbi does pose a question for the ECB. Also the fall in Brent Crude which closed the week with a drop below US $49 per barrel. Oh and they will not have missed that GDP growth was only 0.3%.
The official view is that things are “on track” as Thursdays Minutes told us this.
“The five-year forward inflation-linked swap rate five years ahead stood just above 1.8% on 14 July 2015, up from an average level of 1.6% in early January.”
So not long after the “experts” were telling us it would end early we see that maybe we will get more or at least it will continue to next September.
Hi Shaun,
Another excellent and interesting blog.
Long term I have seen several forecasts that expect UK GDP to be higher than Germany’s by 2030. Their arguments for this were sound and were basically the fiscal and regulatory straightjacket that applies to all Euro countries and the resultant deflationary effects, the poor German demographics which will be mitigated by inward migration from other EU countries, but will still result in the population falling. The UK is viewed as having a more flexible and faster growing economy, better demographics and also as being more attractive to migrants compared to Germany where English is a universal second language, our higher average wages, more tolerant attitudes to migrants and a higher rate of new job creation.
I think it is fair to say that the EU single market has brought a boost to overall European trade, but the change of the EEC to the EU and the introduction of the Euro has been at best poor and a significant minority of countries can only dream of it being that good!
“If the Euro did not exist what would the economies of Greece and Germany be doing right now?” A good question and my answer is that both would probably actually be doing better, where Europe’s growth since the introduction of the Euro has been poor compared to most of the rest of the world. You could argue that a higher DM would have stopped Germany running their surpluses, but the counter argument is that Europe as a whole would probably be richer and Germany as an export orientated manufacturing country would have been in a good position to take advantage of this, whether through increased exports, cheaper local manufacturing or both.
Hi Rods and thank you
One of the issues of a counterfactual analysis is where it leads. For example under the current situation Germany has an official interest-rate of -0.2% which is extraordinary but if it had the DM again the Swiss evidence is that it would be -1% or so!
One of the arguments of how we got into the credit crunch mess was the gap between the trade deficit nations ( UK and US for example) and the surplus ones ( China,Japan and Germany). In that Japan saw a change post Fukushima via energy imports and although it has not been reported as such the decline in the Chinese surplus can be looked at as good. But Germany continues to plough a surplus furrow and the Euro has aided that.
“I think it is fair to say that the EU single market has brought a boost to overall European trade,”
How so?
What trade can you suggest would not have been done without the EU single market?
The regional policy, which has helped living standards in poorer areas, perhaps, but the single market?
Click to access achievements-web_en.pdf
I personally found it easier to export to Europe in the 1990’s and did so, which culminated in me eventually selling the business to a French company.
This is really interesting to me.
How would you say that countries which are part of EFTA but outwith the EU, and therefore the single market, are disadvantaged compared to EU single market countries, trade wise?
The all participate in the Single Market and iirc this means that they have to comply with EU legislative standards for the quality of goods.
https://en.wikipedia.org/wiki/European_Free_Trade_Association
So a country can enjoy ALL the benefits of the single market without membership of the EU?
Yes, apart from the disadvantage that you cannot initiate or directly participate in making any of the Single Market rules, they are delivered to the EFTA country to comply with.
UKIP look at this as an option for the UK and pro-EU groups in reply normally cite that you can’t provide political input into the making of the rules. With qualified majority voting in so many areas now, any countries input is limited unless they are part of an alliance of an opposition majority or at least a significant minority. From what I can see the forming of opposition groups is a political art in its own right as some groups of countries tend to form political blocks that will vote the same way together.
EU countries can’t negotiate their own free trade agreements with non-EU countries, the EU does all the negotiations but EFTA countries can and do. This seems to be a double edged sword. EU clout and inertia v direct country to country flexibility.
Do the Single Market rules not have to conform to, and be limited by, International trade law and rules set by the WTO?
Aren’t the EU’s hands tied by this legislation, which severely limits the EU’s trade law prerogative, to the extent that any country can join the EFTA, knowing that there are such limitations on the EU’s prerogative, vis-à-vis trade law, as to make membership of the body which does legislate, if not irrelevant, then trivial?
Hi Shaun, thanks for explaining this as I read it yesterday and fell off my chair!!
The Euro Area may have disappointed you but not me, in fact it was better than my prediction, probably because I I didn’t factor in further oil price falls when I constructed my prediction last Autumn. Now I expect Euro Area growth to improve to year end, if it doesn’t I lose money!!
Hi Noo2
For Greece we will learn a lot from the Q3 numbers which have not only started badly but may have some payback from Q2. As to the Euro area it may be France which is the “swing producer” as the 0.7% of Q1 (revised up a bit) sits oddly with the 0% of Q2 . So we could see a bounce back there.
The disappointment continues to be Italy which even in better times registers very little.
Shaun
It’s always good to read your blogs, and find some well informed comment and critical analysis. Not like the majority of the media who report Greece’s GDP growth, without question. So they outperformed Germany – right. What have we been worried about all this time?
Hi Foxy
It raises a wry smile that Greek GDP has outperformed Germany so far in 2015 but we do not have to look a lot further back to see it reversed as year on year Germany is stronger. Of course we will find out a lot with the Q3 numbers which I expect to show quite a reversal for Greece.
Hi Shaun
It seems to me that now we know that
Greece has become a sideshow, albeit a painful
one for it;s citizens, then only a country like Italy
getting into difficulty is going to be a big enough
problem to rock the euro boat.
I listened to your world service interview;
what next mainstream tv!
The line it is drawn
The curse it is cast
The slow one now
Will later be fast
As the present now
Will later be past
The order is
Rapidly fad’in
And the first one now
Will later be last
For the times they are a chang’in
Dylan (1964)
JRH
Hi JRH
I have been on the evening Sky News business program back when Italian banks were in trouble. Up until now the BBC had contacted me more than a few times asking me to be on then always something had intervened. Maybe the dam burst?!
As to Dylan I saw him some years ago not far from where I am now ironically as I am helping my mum with a few things. If we move to Italy then it is repeating its habit of not growing much in the better times which poses problems going forwards.
Hi Shaun.
It looks like your reputation for independent impartiality is seeing you star rise.
This would not only be most deserved, but would also be an equally deserved kick in the gonads for the supine.
You may never get a knighthood, but have you seen the reptiles who have?
Keep up the good work.
Thank you.