Greece, heading back to 2002?
On Friday March, 9 the Greek statistical agency announced provisional national accounts data for Q4 2011. Measured in 2005 constant prices, the Greek economy contracted by 7.5% in the last quarter of 2011 driven by a significant reduction in final consumption, both private and public, the free fall in investments by approximately 22% and a slow down by circa 6% in exports. The impact on GDP was partially offset by a substantial decrease in imports by 14.2%.
However, these are not the most worrying signs of this particular release as it was largely expected considering the vice like grip of the austerity measures on the Greek economy. Most concerning are the implications for the first quarter of 2012.
Given the nature of the Greek economy, largely dependant on tourism, economic activity peaks in Q2 and Q3 with the first quarter of each year being the weakest. The drop in economic output has intensified significantly since 2008 with a 10.3% decline in Q1 2009, 9.3% in Q1 2010 and 8.6% in Q1 2011 when compared to Q4 of the previous year. (GDP graph below).
From the EUR49bln of economic output in Q1 of 2007 and 2008, the Greek economy saw a steady decline in the subsequent years with only EUR43.4bln of economic output in Q1 2011. The signs for the first quarter of 2012 are particularly bleak.
The most adverse development, the employment data announced by ELSTAT last week, with the unemployment rate in Q4 2011 standing at 20.7%, compared to 14.2% in Q4 2010, and the unemployed Greeks breaking the one million psychological barrier.
Add to this the significant reduction in disposable income as a result of repeated pension cuts and tax measures since September last year, with the most notable being the property tax through the electricity bills and the reduction of the tax-free threshold to EUR5’000 from EUR8’000 previously.
With an additional 300’000 Greeks out of job compared to Q1 2011 and with those still in employment seeing their incomes reduced, in particular those with lower incomes and pensions that have a very low propensity to save and almost the entirety of their income is directed to consumption, total final consumption could very well exceed a year on year reduction of 10%.
In the absence of funding, for both the private and public sectors, and the country associated risk remaining, there is nothing to suggest that investment will change its nose dive course. Exports have slowed down since November last year and it only leaves a significant reduction of imports to correct the trade balance.
Taking all this into consideration, Greece could be heading for a Q1 2012 economic output below EUR40bln, the level of Q1 2002, and in year on year percentage terms this quarter could be the worst in the country’s modern history with a potential decline of over 9%.
The baseline scenario of the troika’s debt sustainability assumes a contraction of 4.8% of GDP in 2012, or a total output of approximately EUR173bln, in 2005 prices. If Q1 2012 comes below EUR40bln, this suggests that the Greek economy in the remaining three quarters of 2012 will need to generate economic output which is only circa 3.5% lower from the output in the same three quarters of 2011.
Given the current business and consumer sentiment, the reduction in minimum wages and associated benefits across all private sector payrolls – effective from February – the expected downward renegotiation of all sector wage agreements that will expire – per the new MoU – by mid May, the potential further reduction in pensions if contributions – deeply affected by run away unemployment – do not meet the pension fund’s social transfers, unless significant amounts of funds are immediately released for big investment projects that have a high multiplier both for employment and consumption, particularly in depressed economies, there is very little to suggest that the pace of contraction will significantly slow down in the rest of the year.
With the Greek government’s budget – and the troika’s projections – highly dependent on the country’s economic activity it raises serious concerns over the success of the new program.
Time will be the judge…