Need for more measures to emerge
The fiscal numbers may be getting better and economic sentiment may be recovering from the doldrums, but the mood in the streets of Athens and other cities across Greece is getting worse – with no sign of improvement in the foreseeable future – as taxes go up and spending cuts take hold. Recently released data on last year’s GDP (Gross Domestic Product) are doing little to soothe concerns as they point to a bigger-than-officially-projected drop in economic activity and higher unemployment in 2013. Under these circumstances, creditors along with the government may have to review their policy options in the next couple of quarters.
Encouraging data about the size of the primary state budget balance in 2012 has been widely interpreted as a sign that the gap between primary expenditures – spending on wages, social benefits, goods and services, and subsidies – and revenues at the level of general government will be smaller than the 2.9 billion euros or 1.5 percent of GDP estimated by the International Monetary Fund.The bigger-than-projected primary state budget surplus in the first month of 2013 also added to the euphoria despite some reservations about the large amount of taxes yet to be refunded.
In addition, the Economic Sentiment Indicator (ESI) in the European Commission’s business and consumer survey rose in January, giving cause for optimism regarding the course of the economy in coming months and quarters. Also, early signs point to a good tourism season this year, which may help mitigate some of the negative effects from the ongoing fiscal consolidation and labor market reforms.
But this good news has been obscured by disappointing figures regarding GDP and the labor market a few days ago, confirming the deterioration in economic conditions for a large part of the population.
The real GDP dropped 6 percent in the fourth quarter of 2012 compared to a year earlier, driving economic output down by 6.45 percent for the whole year according to non-seasonally adjusted preliminary data. Although this is a flash estimate and the GDP figures may be adjusted upward or downward in the next few months, it should not be taken lightly for two reasons. First because the fall of the GDP is bigger than the 6 percent projected by the IMF and will push upward the budget and debt ratios in 2012 if it is not subject to a favorable revision going forward. And second, and perhaps most importantly, it points to a deeper recession this year due to the statistical carry-over effect, with Nomura putting the economic decline at 5.5 percent. Official estimates put the real GDP contraction between 4.2-4.5 percent in 2013. This is worrisome because the deeper-than-estimated recession will make additional measures imperative.
Moreover, the unemployment rate continues its climb higher, touching 27 percent last November, up from 26.6 percent in October, with more than 60 percent of young people aged 16 to 24 years old out of work and more than 35 percent of 25- to 36-year-olds jobless, according to the Hellenic Statistical Authority. Under these circumstances, it is normal that the ranks of the long-term unemployed – those out of work for more than 12 months – will swell even more.
At this point, more than 30,000 people are losing their jobs in the private sector every month. However, government ministers and other politicians seem to be paying more attention to the fate of 25,000 employees in the public sector who are supposed to be put in a labor reserve scheme for a year on a reduced salary before it is decided whether they are transferred elsewhere in the public sector or fired.
There are already signs this scheme may turn out to be another fiasco for two reasons. First, politicians and public sector trade unions resist it and are trying to slow down the process. Second, some of the employees who have taken their case to court – claiming they should not have been put in the labor reserve system – have been vindicated. It looks as if many others will follow a similar route. Meanwhile, sources have suggested that a number of civil servants already in the labor reserve scheme continue to go to work as usual and receive full pay.
Although the coalition government is holding together and the conservative New Democracy party has a small lead over leftist opposition SYRIZA in the polls, reducing political risk, the prospect of a bigger-than-projected recession may necessitate changes in the economic program in the next three quarters. These may include new austerity measures or/and additional debt relief from the official sector. It is noted that the government will also have to specify measures to close the projected 2015-2016 funding gap before August.
There is no question that the government does not want to hear about new austerity measures this year, since it realizes that it does not have enough political capital for this and may be toppled. On the other hand, it is hard to see how Germany could agree to open a new round of talks on Greek debt relief before the general election next September even though the IMF may ask for it earlier. It is reminded that the European Union has committed to taking initiatives next year to drive the Greek debt-to-GDP ratio down to 124 percent in 2020 from 128 percent, on the condition that the country makes efforts toward attaining the targeted primary budget surplus.
Under these circumstances, the prospect of a deeper-than-projected recession in 2013, following the release of last year’s GDP figures, has raised the specter of either more austerity measures or/and debt relief. This is not good news at a time of high unemployment and will definitely increase political risk if the GDP trend does not improve in the next few months.