Oil and euro keys to economy

The Greek economy may be a small economy; however, it is an open economy with very close ties to its partners in the European Monetary Union (EMU). Therefore, the Greek economy is bound to feel the pinch of the anticipated economic slowdown in the eurozone following last Tuesday’s terrorist attacks on the United States. But the key to the Greek economy’s ability to weather the expected economic storm will be the price of oil in connection with the euro’s performance. If the recent rise in the price of oil is contained or turns out to be temporary and the euro hardens, the Greek economy will be able to come out almost unscathed. However, the same may not hold true for many local firms. It is known that the Greek GDP (Gross Domestic Product) grew at an annual clip of 6.1 percent in the first quarter of 2001 and at 4.9 percent in the second quarter. Although the deceleration in economic growth is evident when one looks at the quarterly figures, they still compare favorably with the eurozone’s 0.1-percent quarter-on-quarter gain in the second quarter. These GDP figures made the revised official growth target of 4.6 percent for this year look feasible just a few day ago. This is no longer the case. Although it is too early to gauge the economic impact that a military strike by the USA and its allies will have on the world economy at this stage, it is almost certain by now that the tragic events in the USA will have a negative effect on the American consumer’s spending habits which kept the economy from sliding into recession. Given the direct and indirect economic links that exist between the USA and the eurozone, it is certain that Europe will feel the consequences. The slowdown in the real economy of our European partners will be passed on to Greece, perhaps with a few months’ time lag, through lower exports and later on through lower tourist receipts. In the meantime, the tendency of capital markets to discount the economic slowdown along with the existing inter-linkages between them will ensure that the local investor who is also a consumer feels the pinch. To some extent, this has already happened as stock prices have fallen to levels not seen since the end of 1998. All in all, the Greek economy will grow at a much slower pace in the second half of the year, putting at risk the official economic growth target of 4.6 percent. Still, the Greek economy can manage to grow at 4 percent or better this year provided it does not get jolted by higher oil prices in the area of 30 dollars or more per barrel in coming months. The past history of oil-price episodes, even the recent one, has shown that the Greek economy, an oil-importing country, is very vulnerable to any sustained rise in the price of oil. Higher energy prices translate not only into a one-off spike in inflation but also set in motion second-round effects which push inflation, especially cost inflation, to higher levels, cutting into the country’s competitiveness. These developments are reinforced by the country’s rigid input, such as the labor market, and output markets which have yet to be dealt with. If the price of oil per barrel remains above the forecast level of 25 dollars in the next few weeks and months and the euro fails to appreciate in order to offset the impact on inflation, Greece’s economy will find itself with the highest inflation level in the eurozone as well as deceleration. The combination of higher inflation, mainly cost-push inflation, and weaker economic activity will have a detrimental effect on consumer and business confidence, putting further pressure on economic growth. If, on the other hand, oil prices are contained and/or the euro appreciates vis-a-vis the dollar and the yen, Greek inflation will fall sharply in the fourth quarter, mainly due to favorable base effects, without compounding the economy’s growth problem. Although the Greek economy may be able to weather the storm, this may not be so for many local firms. The first-half financial results of listed companies showed a drop in earnings before tax to the tune of 13 percent despite a rise in turnover linked to the economy’s high growth rate. Although large-caps did better, on average, than small- and middle-capitalization firms, the results show that profit margins are being squeezed. If the economy slows, as expected, in the second half, it is certain that this will have an impact on their sales. Given the pressure on profit margins, deceleration will translate into lower profits, undermining firms’ valuations and stock prices. If oil rallies and inflation rears its ugly head, things can turn out even worse. In these circumstances, it is certain the profitability of many listed firms will be hurt, putting downward pressure on their share prices as forecasts are revised downward. The expected economic slowdown in the eurozone, enhanced by last Tuesday’s tragic events in the USA, will undoubtedly cut into Greece’s economic growth, which nevertheless should remain strong. However, a sustained rally in oil markets without any beneficial effect from the euro will have even greater adverse effects on growth and inflation. Corporate profits, already under pressure, will be hit whatever the scenario. Yiannis Costopoulos – Alpha Bank

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