If you come to Greece for the first time, listen to people complaining about inflation and joblessness, and read stories in the local press about small and medium-sized companies closing down or facing a liquidity squeeze, you will not believe this economy has grown by more than 3 percent per annum in the last nine consecutive years or so and 3.5 percent so far this year. If you point this out, most people may readily respond that this is mostly because of fast-expanding credit to households. They are right, to some extent. However, it would be wrong to attribute the Greek phenomenon to quick credit expansion alone without taking into account the asset accumulation which is underway and the rise in disposable incomes. Real GDP growth rates in the eurozone averaged 0.7 percent in 2003, 1.7 percent in 2004 and is projected to average 1 percent this year and 1.3 percent in 2006, according to CSFB. During the same time period, consumer spending grew by 1.1 percent in 2003, 1.2 percent in 2004 and is estimated to rise by 1.3 percent in 2005 and 1.5 percent next year. Of course, there are deviations among euro-12 countries with Ireland and Spain on one side of the spectrum and Italy, Germany and the Netherlands on the other. Greece belongs to the bright side of the eurozone, registering real GDP growth rates of 3.8 percent in 2002, 4.7 percent in 2003, 4.2 percent in 2004 on the way to a respectable 3.5 percent this year. With the exception of 2005, investment spending had a significant contribution to this outcome. Strong spending Despite the positive contribution of investment spending to growth, this economic out-performance would not have been achieved without the lift of consumption spending which constitutes the biggest item of aggregate demand. The average Greek household spends enough on goods and services to drive final consumption up by 4 percent in 2002, 2.8 percent in 2003, 3.9 percent in 2004 and more than 3 percent this year. It is no secret that the majority of consumers kept on spending all these years because they saw their disposable income rise at the same time. The reduction of personal income taxes, along with sizeable increases in nominal wages and other benefits in excess of inflation in the last few years, help explain it to a large extent. In addition, the rise in the residential property market more than compensated consumers for the sharp decline of stocks since real estate is estimated to constitute more than 80 percent of overall household wealth in Greece. According to a recent National Bank of Greece report, the cumulative increase in house prices was 172 percent in nominal terms in the last 10 years and 58 percent when adjusted for inflation despite relatively flat prices in the last two years or so. Anecdotal evidence from the real estate market shows a pick up in house prices since the beginning of the year. It is noted that the wealth effect – the feel-good factor – is known to have an indirect effect on consumer spending. The liberalization of the banking sector has also underpinned consumer spending in the last few years since, for the first time ever, Greek households were given access to bank credit to buy property and consumer goods. The liberalization coupled with the lowest lending rates in generations, following Greece’s entry into EMU in 2001, created a strong demand for mortgage and consumer loans which translated into buoyant consumer spending, relieving the negative impact that lower interest deposit rates and bond yields had on the average Greek households’ traditional interest income. The influx of hundreds of thousands of immigrants also had a positive contribution on consumption. If that’s the case, then it is reasonable for anybody to wonder why consumers and many businesses talk about tough times. Of course, Greeks are known to complain even during good times but that alone doesn’t explain the situation. The consumer model of the average Greek household has changed, and it is now closer to the pattern of the average household in the more developed EU countries. This means that DVDs, CDs, TVs or a second car are not considered luxuries but almost necessities. In this context, more and more households do not want to wait for their disposable income to increase to support their purchases. They would rather borrow the money to get what they want quickly. Borrow to buy So, the normal increase in consumption emanating from the rising disposable income is supplemented by consumer loans. This more than compensates for the loss of jobs and lower personal income in some business sectors of the economy, facing competition from abroad, such as textiles, or greater concentration as large companies increase their market share at the expense of small and medium-sized firms, such as retailers. So, aggregate consumer spending remains strong but there are certain soft spots since some categories of goods have fallen out of consumer favor. In this dynamic game, more and more previously unleveraged households join the fray, filling the gap left by those who limit spending to service their old loans. Interestingly enough, the latter also applies to households who have taken out a mortgage to buy a house. They also have more conservative spending plans during the period they service their mortgage loan. However, their home purchases boost their wealth and have an indirect positive contribution on residential investment spending and the economy. Thanks to the increase in disposable income and wealth, the liberalization of the financial services and the lower borrowing rates, the average Greek household has been able to support higher consumer spending consistent with its new elevated consumption pattern. The ensuing strong rise in aggregate consumption has helped underpin economic growth. However, the pick up in consumption is not felt broadly due to changing consumption habits and the efforts by some households to limit spending and service their personal and mortgage loans during this period of asset accumulation. Assuming the process of asset accumulation and economic growth continues uninterrupted for a few more years, the average Greek household will be better off down the road.