Greek recession slows in Q2 but austerity hurting

Greece’s severe recession slowed in the second quarter, data showed on Friday, but economists said recessionary pressures would worsen in the second half as new austerity measures bite, jeopardising Athens’ ability to meet EU/IMF fiscal targets.

Greek gross domestic product fell 6.9 percent in the second quarter from a year earlier, after contracting 8.1 percent in the first quarter, according to a flash estimate from Greece’s national statistics agency ELSTAT.

ELSTAT did not say when it would release seasonally adjusted figures for the second quarter.

Economists said that, although the figures suggested a slight easing in the second quarter, austerity measures were driving Greece’s 230 billion euro economy toward a third consecutive year of steep recession, undermining a second rescue programme hammered out by EU leaders in late July.

“While the annual growth rate has become less negative for the second consecutive quarter … -6.9 percent is still incredibly weak,» said Ben May of Capital Economics.

“It looks like Greece will continue to struggle to meet its budget deficit reduction goals and more generally, we think it will remain in recession for a lot longer than official forecasts predict,» said May, predicting the economy would continue to shrink in 2012 and 2013.

Greece’s budgetary forecasts are built on the assumption its economy will return to modest growth of 0.6 percent next year, accelerating to 2.1 percent in 2013.

A contracting economy makes Greece’s debt mountain of around 350 billion euros even larger compared to its output and decreases the tax revenues available to service it and pay for government administration, schools and healthcare.

Figures earlier this week showed the central government deficit widened by a quarter in the first seven months of 2011.

Athens had already missed targets under a 110 billion euro EU/IMF bailout programme agreed last year, forcing Prime Minister George Papandreou’s government to agree a new round of austerity measures in June to avert bankruptcy.

In response, EU leaders agreed a further 109 billion euro bailout for Greece, subject to Athens pressing ahead with the austerity and privatisation package.

With a VAT rate increase and a lowering of the threshold to pay income tax agreed under that plan due to kick in from September, economists warned that consumption was likely to be further hit in the second half of this year.

“Most conjunctural, key forward-looking indicators in the third quarter point to a deterioration,» said Nikos Magginas of National Bank of Greece. «In the second half, we expect recessionary pressures to increase because all corrective fiscal measures will fall in that period.”

Magginas forecast a full-year contraction of GDP of between 4 and 4.2 percent of GDP, slightly worse than the government’s target of a 3.9 percent drop.

Rising unemployment is also likely to weigh on domestic demand. With companies shedding jobs and many shops closing, unemployment in Greece already hit a record high 16.6 percent in May as job cuts in the wider economy outweighed the seasonal rise in tourism.