Economy grows strongly

Momentum will likely carry into 2007, unless elections or US troubles put brakes on

By Dimitris Kontogiannis - Kathimerini English Edition

The Greek economy surprised again on the upside in 2006, like it did in 2005, but it does not have to do the same in 2007 to come up with one of the best performances in the eurozone.

The consensus estimates are already good. They point to strong GDP growth, declining inflation,

a smaller budget deficit and public debt as a percentage of GDP

and lower unemployment. Of course, the classic structural problems remain. But it will take a combination of bad international and domestic events to break Greece’s 10-year-plus outperformance record vis-a-vis the average eurozone growth rate in 2007 and this is not likely.

For those who live in the country or abroad and are able to read Greek, just going over the headlines of the local press in 2006 would have given them the impression that the local economy was heading into a recession and not expanding at 4.2 percent year-on-year in the first nine months of the year. It would have made them think that personal disposable incomes were shrinking but corporate profits were surging, unemployment was on the rise and public finances were improving at the expense of private consumption.

Yet, most of these assumptions or impressions would have been contradicted by the actual national accounts figures. The latter may not be good in capturing important economic aspects, such as income distribution. They do not, however, fail to give the general direction the national economy is heading, especially if there is an upward trend in place for many years.

Indeed, 2006 was a good year for corporate sales and profits, judging from the published financial statements of listed companies in the first nine months of the year, and this is unlikely to change. 

It turns out that it was also a good year for the average consumer, who saw his real wage rise by an estimated 3.0 percent, paving the way for an estimated increase of 3.8 percent in spending on goods and services compared to 2005 despite the elevated oil prices. The buoyant consumption spending figure was also underpinned by continued growth in employment and a drop in the unemployment rate below 9.0 percent of the labor force and double-digit growth in credit expansion. The easing of inflationary pressures also contributed to this effect.

Investment spending also bounced back with a vengeance despite the higher cost of credit, aided by perky construction activity and strong business sentiment, driving capacity utilization to 76.1 percent in the first nine months of the year compared to 72.1 percent in 2005.

Net exports, that is, exports minus imports, continued to be a drag on GDP growth despite a 20 percent-plus increase in Greek exports compared to a year earlier, helping drive the current account deficit to 11 percent of GDP or more in 2006.

Even if one does not take into account the reduction of the budget deficit to an estimated 2.6 percent of GDP in 2006 from 5.2 percent in 2005 and the drop in the public debt-to-GDP ratio to about 104 percent from 107.5 in 2005, 2006 was generally another good year for the Greek economy.

Perhaps more importantly than what happened in 2006, there seems to be enough momentum to carry over the torch of economic growth in 2007. With oil prices and fiscal consolidation providing fewer headwinds than in 2006, consumer spending appears to have the stamina to produce a 3.0-percent-plus gain next year. Wages are expected to rise by about 3.0 percent in real terms and disposable personal income by even more as tax cuts come into effect. It is noted that consumer spending accounts for more than two-thirds of total spending in the Greek economy and its importance is obvious.

Companies are also seen spending more on plants and equipment to meet the anticipated strong demand for their products while lower corporate tax rates paint a brighter picture for their net profits. In addition, residential investment, an important part of overall capital spending, appears to be solid.

Lingering questions about the strength of the eurozone economy in the aftermath of a series of interest rate increases, a VAT (value-added tax) hike in Germany and tighter fiscal conditions in Germany and Italy make it a more challenging environment for Greek exports. However, the composition of Greek exports appears to be less price sensitive and projections for import demand in Southeastern Europe, where a big chunk of local exports heads, are good at this point.

Even if Greek GDP growth slows a bit to about 3.8 percent in 2007, it will be enough to keep the budget deficit at 2.6 percent of GDP or lower and further compress the public debt to GDP ratio to 100 percent. It will also help bring headline inflation closer to 3.0 percent on average from about 3.2 percent in 2006.

At this stage, anyone who attempts to project how the Greek economy will do in 2007 may find himself in the same position with stock market forecasters. The consensus sees 2007 to be another good year overall for stocks despite the usual ups and downs.

However, when most estimates point in the same direction, the contrarians usually turn out to have placed the best bets. So, one may ask what are the biggest risks to the rosy 2007 estimates for the Greek economy?

We think there are two risks which may cause some damage but even so it will not be such to change the Greek economy’s longstanding upward trend.

First, a recession in the US economy on the heels of pricking the bubble in the real estate industry and hitting the US consumer. Such an event would have had international repercussions and hurt large eurozone economies and emerging markets Greece has had trading ties with. It would also hurt stock market worldwide and therefore damage household wealth, a key to consumer spending. This event is not likely according to the strategists of the 12 biggest US investment banks.

Second, a pure domestic event. The possibility of early elections along with a protracted pre-election campaign period could have created enough uncertainty to stop some investment projects and make the average Greek consumer more cautious. However, this event alone could not derail the economy from its expansion path but rather chop a 1.0 percentage point off the projected 3.8-4.0 percent growth rate in 2007 under the worst-case scenario.

Of course, the worst of all possible outcomes would have come if both events occurred at the same time. In that case, the Greek GDP growth rate could have fallen closer to 2.0 percent, the lowest in more than a decade. Of course, never say never, as some have said in the past, but it would be quite risky for one to bet his money on such an outcome in 2007.