ECONOMY

A surprise again in 2006?

Few people expected the Greek economy to record a 3.5 percent growth rate in the first year after the Olympics; we certainly were wrong in our forecasts. What explains the sustained performance is continued high consumer spending, low interest rates and favorable conditions in international trade. The same conditions could recur in 2006, although, again, a lot will depend on the state of the global economy. The euro/dollar parity, oil prices and those of other important raw materials, and, ultimately, dynamic consumer spending will be the main factors at play. A great deal hinges on the ability of the US and China to maintain their dynamism and of Europe, Japan and the other, lesser economic powers to make up any slack there. A few bold analysts had predicted the steep rise in the price of oil last year. The general consensus had been for an average of $37 per barrel, a far cry from the $55 where it ended. The same goes for the dollar/euro parity. The forecasts had been for around 1.35 but the balance much lower. The former development boosted the incomes of the oil-producing countries: $270 billion, against $125 billion in 2004. In turn, these huge proceeds maintained demand for the exports of the rest of the world. The achievement of this balance in 2005 is also explained by two other combined developments. Nominal wages and salaries rose by much less than initially predicted, and so the European Central Bank found it easier to keep its basic rate at the particularly low 2 percent until the first week of December. Whereas the the European Commission and most analysts had forecast that wages would rise by around 2.5-2.7 percent, they actually did not exceed 1.8 percent. This, combined with continued strong lending, explains the maintenance of consumer spending that kept growth rates brisk. The same factors, but one, also explain the success of the policy of «mild» fiscal adjustment in Greece. Greek incomes continued rising at a good pace. Costs per labor unit were up 3.3 percent, against an average of 2.6 percent in the 2000-2004 period. It would be sufficient if such costs did not grow over 3 percent in the coming years for Greece’s competitiveness not to deteriorate. Whether such a target is realized depends on the maturity of employers and labor, who have already begun negotiations for a wage pact.

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