Inflation may stymie growth

Although it is still early to make a call on Greek inflation this year, the unexpected jump in national consumer price inflation to 4.3 percent year-on-year in February shows that optimistic private and official forecasts for a significant drop in inflation in 2002 were rather optimistic and way off the mark. This, coupled with the visible signs of economic slowdown, if not recession, in some key European Union (EU) economies and bruised sentiment from the protracted stock market slump point to slower GDP growth rate ahead. The likelihood of persistently high inflation and slower-than-projected economic growth calls for macroeconomic and microeconomic policy adjustments which are difficult to implement during an unofficial election period. Forecasts dashed Following an expected drop to 3.1 percent year-on-year in national consumer price inflation in January from 3.4 percent in December 2002, Greek inflation surprised even the pessimists by leaping to 4.3 percent year-on-year in February. The jump came on the back of sharp rises of 7.6 percent in housing, 6.0 percent in transport, alcoholic drinks and tobacco, 5.8 percent in hotels, 5.7 percent in health and 4.5 percent in education, which shows that higher oil and fresh produce prices took their toll but that other factors contributed as well. Most economists expected Greek average national inflation to fall this year, though nobody seemed to share the government’s 2003 budget projection of 2.5 percent average inflation in 2003 versus 3.6 percent in 2002. Most private forecasts ranged from 2.7 percent to 3.3 percent and were mostly based on the positive effects incurred by the appreciation of the euro versus the dollar and other major currencies, some favorable base effects as 2002 inflation was burdened from price hikes linked to the physical introduction of the euro, the reversal of the upward trend in world oil prices, the avoidance of last year’s steep increases in fresh vegetable prices and an expected slowdown in unit labor cost growth. Although the euro has continued to appreciate, the war in Iraq coupled with other concerns about the demand-supply equilibrium in the oil market have propelled world oil prices even higher, pushing Greek inflation past the 4 percent mark. In addition, bad weather has not helped fresh produce prices either. Greek inflation may ease somewhat in March and even more in April-May on the heels of favorable base effects as the prices of many goods and services were marked up in March 2002 to take advantage of the introduction of the euro while excise taxes on cigarettes were also raised. It is rather unlikely that average Greek inflation will fall below 3 percent this year unless oil prices tumble. Even so, the Greek-EU harmonized inflation differential, which eased to 1.3 percentage points last December from 1.5 points a year earlier, will most likely widen further as weaker economic conditions elsewhere in the EU and eurozone dictate a sharper drop in inflation. It is noted that the market consensus wants euroland inflation at 1.7 percent this year versus 2.2 percent in 2002. On the other hand, the persistently high local inflation is bound to have an adverse effect on private consumer spending and this should show up in GDP growth, especially if stock market conditions do not improve, the residential real estate market gets stuck and uncertainty prevails in the international environment. In addition to this, an expected slowdown in economic growth in the eurozone is going to have an adverse impact on the Greek export sector. Merrill Lynch revised downward its already low GDP growth forecast for the eurozone to 0.8 percent from 1.2 percent earlier, following the ECB’s recent 25 basis point interest rate cut. The strong euro, which helps fight inflation, is also going to hamper local exports to the USA and other markets that use the US dollar as a yardstick. It is noted that the Greek trade deficit widened in 2002 as export receipts fell 9.6 percent year-on-year and non-oil imports were flat. Of course, nobody doubts that the Greek economy will continue to expand this year as well. However, GDP growth may come in at less than the official projection of 3.8 percent if high oil prices do not reverse course and the uncertainty hurting the world economy does not subside. It is noted that the Greek economy surprised many last year with its 4.0 percent growth, more than the official 3.8 percent estimate. Corporate weaknesses Recently published sales figures by listed companies confirmed the economy’s vigor but also pointed to problems in the corporate bottom lines. The aggregate turnover of Greek listed companies rose 5.2 percent year-on-year in 2002 but earnings before taxes and after minorities fell 16.6 percent as profit margins shrank to 8.0 percent from 10.1 percent in 2001. The picture looked much better if one excluded banks and other financials (insurance companies and closed-end funds) from the list, which is indicative of the deep scars left by the protracted stock market slump on the local financial sector. Indeed, sales rose 6.7 percent year-on-year last year on flat earnings, up a mere 0.1 percent with profit margins tightening but to a lesser degree, that is, 7.4 percent from 7.9 percent in 2001 according to EFG Eurobank Securities SA. Still, the economic growth and inflation outlook of the Greek economy has not got better in the last couple of weeks. The unpleasant inflation surprise in February has dashed hopes of a significant drop in average Greek inflation this year and has compounded worries about a much slower GDP growth rate this year in view of the possibility that oil prices remain high, even with a quick resolution of war in Iraq, and the eurozone economy stagnates. The government and corporations could have taken measures to deal with this well-known problem. It looks as if the unofficial election period and the drive to beef up corporate profits through price increases have discouraged any initiatives to tackle it.

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