Greece may be winning the battle for fiscal consolidation but it seems to be losing the war to transform its economy from one based on consumption to one fueled by investment and exports.
Although exports are seeing their share of gross domestic product rising, investment has been dropping, undermining the country’s future growth prospects. If this trend continues, Greece may not be able to attain satisfactory GDP growth rates and will therefore struggle to come up with the kind of primary budget surpluses associated with sustainable public debt levels.
Backed by the most recent data, there are increasing signs that Greece may be able to come close and even beat the goal for a general government primary deficit of 2.4 billion euros or 1.2 percent of GDP in 2012. This is mainly due to the overdose of austerity which helped overcome the bigger-than-estimated drop in real economic activity last year.
A new set of spending cuts and tax hikes is expected to hurt the economy again this year but is likely to produce a larger-than-expected primary surplus. Revenues are projected to exceed expenditure (without including interest payments) by about 750 million euros, or 0.4 percent of GDP, according to the country’s medium-term fiscal strategy framework.
But the encouraging developments on the fiscal front cannot hide disappointing trends elsewhere. Two-and-a-half years after the government of George Papandreou sought a bailout from the European Union and the International Monetary Fund, followed by the implementation of policies aimed at paving the way for sustainable development in the future, some figures are either disturbing or at best do not look promising.
Almost everybody would agree that Greece was living beyond its means for a long time and that this should have been corrected. Consumption spending supported by rising disposable incomes and ample and cheap credit after the country joined the eurozone in 2001 was behind it and the obvious culprit which had to be dealt with. The economic adjustment programs sought to correct the fiscal and external account imbalances by imposing higher taxes and cuts on salaries and pensions and other measures to improve competitiveness, such as lower minimum wages in the absence of a national currency that could be devalued.
The policies of internal devaluation contributed to the contraction in consumption. Total consumption spending is estimated at 178.2 billion euros last year from 191.8 billion in 2011 and 203.8 billion in 2010. It had reached an all-time high of 214.6 billion euros in 2009, almost double its size in 2000, according to European Commission data.
Private and public consumption spending contracted by about 36.4 billion between 2009 and 2012 at the same time economic output fell by about the same amount or 36.1 billion. GDP is estimated at 195 billion in 2012 from 231.1 billion in 2009. Therefore, it comes as no surprise that households and the government are consuming less but the share of total consumption as a part of GDP has remained resilient, easing to 91.4 percent last year from 92.8 percent in 2009, according to our calculations.
In other words, the much-desired and sought-after decrease in consumption spending has been analogous to the drop in GDP during the 2009-12 period. Of course the EC projects the share of consumption spending in GDP will fall faster this year and next to about 89 percent and 86.4 percent respectively. However, these are still projections and even so the drop is not as big as the proponents of a different economic model hoped for.
On the other hand, the picture presented by the export sector appears rosier since the figures show exports of goods and services have been rising constantly since 2009 although they are still lagging behind the high of 56.3 billion euros in nominal value in 2008. Exports are projected to rise to 54.3 billion in 2012 from 44.5 billion in 2009, comprising a larger portion of GDP. Total exports are projected to reach 28 percent of GDP in 2012 from 19.3 percent in 2009 and 24.1 percent in 2008.
With more and more private firms becoming more extrovert as they try to limit the impact of the economic crisis at home and promising prospects for tourism revenues in 2013, the view from the export side is good. It is the brightest spot as far as the much needed transformation of the economic model is concerned.
Unfortunately, the figures from the investment side are discouraging. Gross fixed capital formation, which refers to the net increase in physical assets without including land purchases and the depreciation of fixed capital, has been declining constantly since 2007. This is true both in current prices and a share of GDP.
Greece’s gross fixed capital formation is estimated at 27.3 billion euros last year from 31.6 billion in 2011 and 39.2 billion in 2010. The projection for this year at 26.1 billion is not good either. The figure stood at 45.9 billion in 2009, 52.6 billion in 2008 and 59.4 billion in 2007. It fell to 14 percent of GDP last year compared to 20 percent in 2009 and 26.6 percent in 2007.
Even worse, the figures for future fixed capital formation which subtracts the consumption of capital (depreciation) have been negative since 2011, meaning new investments are less than depreciation, decreasing the country’s fixed capital stock. This is obviously bad news for future growth since it contributes to limiting the country’s potential GDP.
With total consumption spending falling but at a slower pace than hoped for compared to GDP, investment spending dropping dramatically and only exports providing hope, the much-needed transformation of the Greek economy is clearly not on track. Since the export sector is too small to carry the economy on its back and sensitive to economic conditions abroad, prospects for investment spending will have to brighten considerably for Greece’s future economic growth rates not to disappoint and not undermine efforts to produce the large primary surpluses required for servicing the public debt.