According to EC autumn forecasts released today, Greek GDP contraction is expected to extend into 2013 to 4.2% from 6.0% in 2012. EC latest estimates are worse than its previous (spring) projections for 2012, when GDP was expected to slip 4.7%, while 2013 forecast remains unchanged. It is noteworthy that recent Greek government GDP estimates are more conservative forecasting GDP to contract 6.5% in 2012 and 4.5% in 2013.
EC notes that the main drivers of GDP contraction remain broadly unchanged: First, household disposable income keeps shrinking in response to rising unemployment and downward wage adjustment in both the private and public sectors. Second, savings measures introduced to contain the fiscal imbalances reinforce the contraction of domestic demand. Third, investment activity remains heavily subdued due to restrained access to credit and the uncertainties that remain after the political tensions around the double elections in spring 2012. In addition, exports dynamics affected by weakening external demand are insufficient to counter recessionary pressures in Greece.
The turning point of the recession is expected in the second half of 2013, leading to moderate GDP growth of 0.6% in 2014. EC projection relies on the return of confidence and investment, boosted by the implementation of reforms under the economic adjustment programme, as well as progress with major projects co-financed by EU funds. The C/A deficit is expected to move closer to sustainable levels, reaching 5.2% of GDP in 2014 from an estimated 8.4% in 2012 and 6.3% in 2013.
According to EC, the labour market is expected to bottom out in 2013 (24.4%) and recover only slowly thereafter, with the unemployment rate at 22.2% in 2014. Previous EC forecasts indicated much lower unemployment at 19.7% in 2012 and at 19.6% in 2013. Note also that latest ELSTAT data show unemployment rate stood at 25.1% in July ’12 predisposing higher unemployment figures for the coming months and next year. In the medium term, EC notes that the fall in the unemployment rate should gain momentum, reflecting structural labour market reforms aimed at promoting flexible forms of employment and the decentralisation of wage negotiations.
The government aims to achieve a primary budget balance in 2013. Based on the current projections, EC points out this would require additional measures of around 5% of GDP, which are being adopted with the 2013 budget. This would reduce the government deficit to 5.5% of GDP in 2013 further easing to 4.6% in 2014. Furthermore, primary balance is seen at -1.4% in 2012, zero in 2013 turning positive to 1.5% in 2014. Previous estimates were calling for a primary deficit of 1.0% in 2012 and 2.0% in 2013.
Gross public debt is projected to increase to 176.7% of GDP in 2012. This is 16 percentage points higher than foreseen in spring, reflecting revisions to nominal GDP, lower growth and privatisation proceeds and other stock flow adjustments. The debt ratio is projected to rise to 188.4% of GDP in 2013, mainly on account of the sizeable nominal contraction of the economy and to peak in 2014 at 188.9%. Thereafter it is expected to fall at an accelerating pace, supported by stronger nominal GDP growth and an improving budget balance.
“Greece Drinks the Hemlock” is the title of the NYT-editorial on the passing of austerity measures. I consider the following sentence as the most important one:
“Greece cannot pay off its debts when it is shutting down its economy. It has to put people back to work”.
And the sentence following the above I consider the most questionable one:
“The only way forward is through more debt write-offs and more low-interest European loans, as well as by opening up restricted job markets”.
Even if all of Greece’s debt were forgiven, it wouldn’t change much in the functioning of the Greek economy. If all restricted job markets were opened up overnight, it might change something but I would only believe it when I saw it.
Either way, the Greek economy would continue to be an economy which does not generate enough value to justify the standard of living which Greeks justifyably desire. There simply is not enough domestic production to satisfy a greater portion of domestic demand (making horrendous imports necessary and underutilizing domestic resources) and there certainly is not enough domestic production to generate the amount of exports necessary to justify the desired imports. And with all that underutilization of resources, chronic unemployment cannot be avoided.
Thus, I return to the ‘early promising signals’ which I have described in a previous post. A better future for Greece can be expected when the following sentiments are felt throughout Greek society:
* an obsession with import substitution
* an obsession with export expansion
* an obsession with making tourism/shipping competitive
* an obsession with private foreign investment; and, last but certainly not least:
* an obsession with the EU Task Force to do everything possible to modernize Greece’s public administration and to make Greece a governable state
If and when that happens, the issue of a debt write-off (which may still be necessary) will become a side issue. Creditors have already accepted the fate that existing debt must be considered – to a large extent – as ‘spilled milk’. The difference is that foreigners (creditors and, above all, investors) will be happy totransfer Fresh Money to Greece because they can have the confidence that the money is well spent.