Does consumption growth result from rise in credit?

When the scandals do not become headline news, individuals complain about low wages and unemployment and businessmen about the presumably worsening economic conditions. These complaints usually play out in newspapers, television and radio shows. This is in direct contradiction of official numbers which for more than 10 years now show Greece is making progress. Supporters of the proposition that things are getting worse have long attributed the strong GDP growth to the double-digit growth in loans to households, which purportedly underpins private consumption spending and keeps the economy growing at a satisfactory pace. This may be partially true but it does not bode well with another figure which is often overlooked. The double-digit growth in the deposits of domestic households and enterprises published by the Greek central bank for quite a long time. It is known the Greek economy grew by about 3.6 percent on average during the 1994-2005 period, surpassing the average 2.3-2.4 percent growth registered in the 15 core countries of the European Union (EU-15). As a result, the average Greek household saw average income rise faster than its counterpart in the EU-15 by some 1.2 percentage points on average during the same period when measured in purchasing power units. The fact that the EU has expanded to include 10 new members has changed the comparative statistics but Greece looks set to outpace its eurozone partners in economic growth this year and perhaps next. Critics have long argued that these statistics do not take into account the fact that Greek households have been borrowing aggressively for a number of years to buy big and small consumer ticket items, pay the tuition of their children and finance other activities. They do so, according to them, because their income is not high enough to maintain the same consumption spending level and in so doing they boost GDP growth rates, overestimating the true level of standard of living. Low starting point Official figures put out by the central bank support the thesis that retail loan growth has been strong in Greece for years but this does not necessarily means critics are right. First of all, Greek household indebtedness was very low compared to the EU average a few years ago and so it was normal to expect a pick up from such a low base. The fact that consumer borrowing was not fully liberalized and interest rates were high explain it. With nominal interest rates coming down to levels not seen in generations after Greece’s entry into the eurozone and the liberalization taking full effect later, this outcome was quite predictable. Undoubtedly, a portion of households rushed to borrow to help meet pressing financial and other needs but this is more the exception rather than the rule. The vast majority took out loans to smooth out its consumption spending cycle, buy real assets and generally boost its standard of living. This trend appears to continue since consumer loans increased by about 24 percent year-on-year to 24.6 billion euros and mortgage loans by 31.38 percent to 52 billion euros in July. Credit card balances were up 2.65 percent to 8.5 billion as people took out personal loans carrying lower interest rates to pay off their credit card balances. Consumption is a function of current and future personal disposal income and to a lesser degree net wealth. The strong rise in real estate property prices and stocks over the last few years must have had a positive contribution on private consumption although it is not easily discernible. However, the 3.0 percent plus increase in private consumption spending over a number of years should have been underpinned by a strong rise in personal disposable incomes. The latter is what is left in net after you pay taxes and is split between consumption and savings. Even if one doubts the quality of statistical data on personal incomes, he or she should have no such doubts about the available data on deposits published by the central bank. A look at the total deposits of domestic households and enterprises reveals a consistent double-digit increase on a monthly basis since 2001 with the exception of 2002. The average yearly increase in deposits, including sight deposits, savings and time deposits, appears to exceed 15 percent so far this year, it had been 22.1 percent in 2005 and has been above 10 percent the previous years except for 2002 when it was up a mere 2.9 percent. Even if retail borrowing supports private consumption spending and therefore GDP growth, it is hard to accept that this takes place at a time personal disposable incomes are declining but deposits continue to rise at a fast pace. Even if borrowers prefer to lose money by putting their loans in low interest rate deposit accounts, this means they think they can still service their loans and spend more on consumption. The latter is almost impossible to do without a healthy increase in disposable income or asset sales. There is no doubt that it is very difficult to gauge how wealth is distributed across different social strata from aggregate data. It could be quite possible that income distribution is so unequal in Greece that the rise in consumption, deposits and GDP at the same time reflects more the actions of a small percentage of the population. In this case, this small percentage lives well and the vast majority suffers. Although there are a number of people who live on a small pension or a small wage and therefore find it hard to meet their needs, there is good reason to believe the consequent rise in consumption and deposits over a long time span reflect more a consistent increase in the standard of living of the average Greek household than anything else. The existence of a gray economy, for example in the construction and related industries, just confirms that the situation may be better on average than appearing in the official statistics.