ECONOMY

Consumption projected as a growth engine

The latest survey by the Foundation for Economic and Industrial Research (IOBE) confirms what previous ones by the Bank of Greece and Alpha Bank had found – that growth in Greece relies heavily on consumption. All evidence points to the economy’s growth rate falling this year to 3.5 percent with a rise in exports, drop in imports and strengthening of private investments and final consumption. The IOBE survey suggests that the slowdown in gross domestic product (GDP) expansion in 2005 below 4 percent for the first time since end-2002 is to a great extent due to the decline in investments. They record a 1 percent drop, which they had not done for at least a decade, against a 5.4 percent rise in the first quarter of 2004. This way the rise of final demand slowed down by 0.2 percent, limiting the share of investments in final demand, unlike consumption which broadened its share to 2.5 percent, therefore remaining the main growth engine for the Greek economy. The greatest percentage of total consumption expenditure, according to 1998 data, is directed to the Food, Wine and Tobacco category (with 21.7 percent) and that of Various Goods and Services (including eating out, hotels, etc.) at 21.2 percent of all spending. The former category may have dropped since 1988 (it was at 25 percent) but remains at one of the highest levels in Europe. The Housing, Water, Fuel and Lighting category stands quite high at 18 percent of all expenses, while apparel spending takes a respectable 10 percent despite the sector’s decline in recent years. Transport and Communications (including purchasing and maintaining private vehicles as well as paid-for transport services) cover 10.6 percent. Comparatively low is the share of spending in health, recreation, entertainment and education and in lasting home goods, though there is a rising trend in health and medical expenditures. Looking ahead The survey goes on to predict the Greek consumer profile five years on. By 2010 Greeks will be spending more on apparel, lasting house goods, health (reaching 6.1 percent of total consumer expenditure in 2010) transport and communications (up to an 11.4 percent share in 2010). On the contrary a drop is expected in expenditure for food, drink and tobacco (18.7 percent in 2010), and for housing, water, fuel and lighting (17.4 percent in 2010). Finally, spending on recreation, entertainment and education will remain stable through these years. Those findings are based on three scenarios regarding the increase of income by 2010. The likeliest one foresees a rise in disposable income by 3 percent annually, the optimistic one expects a 3.5 percent rise while the pessimistic one uses a mere 1.5 percent rise. After trends were projected on the relation between income and consumer expenditure, the following changes were forecast for the next five years: – The share of the Food, Wine and Tobacco category will drop due to the decline in Bread-Cereals, Oil-Fats and Potatoes-Other Food. – The Apparel sector will increase its share thanks to the significant rise in Clothing, while the Transport and Communication category is in for a boost by the Private Transport Means, i.e. cars and motorcycles. – The Housing, Water, Fuel and Lighting category will post a marginal decline dragged down by spending on housing and water. – A small rise in spending is expected in these subcategories: houseware & home services, hospital treatment & paramedical health services, books & education, cosmetics and hotels. The decline in the share of certain consumption categories does not signify a drop in absolute figures, though. Real private consumption expenses, according to the likeliest scenario of the study, are projected to increase from 1998 to 2010 by 42 percent. This development is mainly attributed to the constant rise of the national income in the current decade and the improvement in the disposable income of households. Broken down in sectors, the rise in private consumption is expected to be most impressive in apparel, likely to come to 63 percent in the 1998-2010 period. Strong increases are also expected in consumption at the sectors of Recreation, Entertainment and Education (26-53 percent), of Transport and Communications (22-60 percent) and of Housing, Water, Fuel and Lighting (29-61 percent). On the other hand, the smallest rises in consumption are expected in the categories of Food, Drink and Tobacco (15-30 percent) and of Lasting House Goods (5-28 percent). The consumption pattern of the average Greek household is formed not only by the financial parameter (prices, income), but also by a series of social and demographic characteristics. The extent of the participation of women in the labor market as well as the age structure of the population, unemployment and other factors determine consumption. Consequently, our consumption culture is about to show significant changes this decade.