Consumption paradox

Greeks keep spending more while complaining they cannot afford to do so

By Dimitris Kontogiannis - Kathimerini English Edition

You can call it the Greek consumption paradox. On the one hand, almost all kinds of quantitative data points to strong consumer spending and strong GDP (gross domestic product) growth and, on the other, businessmen, consumer advocate groups and individual consumers being interviewed on TV, radio shows and in newspapers complain about inflation and low wages, saying they have restricted or plan to cut consumer expenses. What’s going on?

According to official figures put out by the Finance Ministry last week, the Greek economy grew by 3.6 percent on average during the 1994-2004 period, surpassing the average growth of 2.4 percent recorded by the 15 old members of the European Union. On a per capita GDP basis measured in purchasing power units, the average Greek saw his/her living standard rise faster than his counterpart in the EU 15 by 1.2 points on average during the same period. The data shows the same story was repeated last year, with the Greek economy expanding at 3.7 percent compared to 1.4 percent on average in the EU’s old guard.

Of course, aggregate data, such as per capita GDP, does not reveal how this creation of wealth is being distributed to different social strata. It is quite possible that the distribution may be very uneven, so a large chunk of the population is left out and the benefits of economic growth are accrued by a relatively small portion of the population. Although there are no updated figures on income distribution, it is quite possible that inequality may have increased but it is very hard to believe it reached extreme levels during this long streak of economic growth.

One way to look at the effects of economic growth on the population is to examine the trajectory of the employment rate for those aged between 15 and 64. Greece’s employment rate remains one of the lowest in the EU despite the fact that it rose to 60.1 percent of the labor force in 2005 from 59.4 percent in 2004 and the incremental gains it registered in the years before. Even here though there are cultural differences, such as the low participation of women and between Greece and its other European partners, especially the northern ones, which partially helps explain it.

On the other hand, Greek inflation has been higher than the average inflation in the EU-15 during the 1994-2005 time span. Even so, wage increases outpaced consumer price inflation most of these years, resulting in real wage rises. Even accounting for Greece’s superior productivity performance, the data points to a rosy picture for Greek personal incomes.

One may have doubts about the distribution of income in Greek society but should have no doubt whatsoever about healthy increases in the consumption spending underpinning strong GDP growth rates during the 1994-2004 era. This was even more so last year when total investment spending on fixed assets declined by about 1.6 percent, compared to a year earlier but the economy unexpectedly grew by 3.7 percent. Without any strong increase in total consumption spending, both public and private, which accounts for about 82 percent of GDP, the Greek economy would not have been able to go anywhere. This argument is backed up by a pick up of 3.3 percent in the volume of retail sales in inflation-adjusted terms and a nominal increase of about 6.9 percent in net tax receipts last year.  

The latest figures from the consolidated sales of some 313 companies listed on the Athens bourse back up the aggregate consumption data. Revenues rose by more than 11 percent to 77.7 billion euros in 2005, according to data bank Hellastat, that is, much more than inflation. Even if one takes into account the recorded increase in Greek exports and the sales of their subsidiaries abroad, one would not expect this to happen without the support of the average Greek consumer.

Still, the complaints from individual consumers, craftsmen, businessmen and others have been a daily phenomenon. But the first raw data on VAT (value-added tax) for the first two months of the year reported by Finance Minister Giorgos Alogoskoufis have been very encouraging about the pace of economic activity, and consumption spending in particular. The collection of net tax receipts for the ordinary budget is supposed to have picked up by some 17 percent in the January-February period, which cannot be explained by the arrest of tax evasion alone. Moreover, business confidence in retail and other sectors appears to be improving. This should have been the case had consumer spending been about to take a dip. 

Of course, the double-digit growth in credit cards, and personal, consumer and mortgage loans over the last few years has contributed to this increase in consumption spending. According to a recent study commissioned by the Bank of Greece, some 47 percent of Greek households had taken out a loan at the end of 2005 with the average loan per person increasing to more than 19,000 euros compared to some 14,500 euros in 2002. Of course, averages sometimes mask the underlying picture but low income households appear to be struggling the most to service these loans.

It is easy but not wise to disregard all the complaints about how tough it is for many households and firms to make a living at the same time as the macroeconomic numbers paint a different picture about consumption, the largest component of GDP. Of course, Greeks, businessmen and others have a tendency to underestimate their benefits and overstate their problems even when times are good. However, it looks as if the Greek economy has been going through a transition period, whereas many small firms and shops in different sectors are closing down as large players gain market share at their expense or simply take their production to neighboring countries to become more competitive. In this kind of an environment, the economy may grow strongly, supported by healthy increases in consumption spending but segments of the society, employers and employees alike, are feeling the pinch and become very vocal in expressing the deterioration in their living standards or at least their inability to catch up with their peers or their own expectations. This likely explains the Greek consumption paradox.