The Greek economy outgrew its eurozone partners again in 2007 but it increasingly looks like it will face stronger headwinds than expected this year as world oil prices do not seem to be coming down significantly from record levels, although the credit crisis has started hurting economic activity in the USA and elsewhere. Crude oil futures surpassed the 101-dollar mark per barrel last week before receding later for no apparent reason, as analysts in the oil industry pointed out. This is not what one should have expected for the US economy, which is the biggest consumer of oil worldwide accounting for 25 percent of global consumption, and may be slowing to the point of recession. Oil outlook uncertain One could say it is too early to predict whether world oil prices will remain at these elevated levels for the rest of the year but it is certainly not encouraging that oil prices are pointing to levels above 80 dollars per barrel in the long run. This says the market is discounting high crude prices for many years to come. This is not good news for the Greek economy, which is more dependent on oil than other oil-importing economies in the eurozone. An important assumption for the local economy’s ability to weather the current storm of the credit crunch and slower world economic growth has been the expected easing of world oil prices on the back of weaker demand. Since oil prices do not seem to be easing to lower average levels than last year, one has to take into consideration and adjust downward the projected GDP growth while raising the average level of inflation for 2008. Help from the euro This is so even if the euro remains strong this year with the euro/dollar rate hovering between 1.45 and 1.50 for the rest of the year. It should be noted that the appreciation of the euro against the dollar in the last few years has helped Greek and other citizens of eurozone countries feel less of the pinch of record world oil prices. On the other hand, the strong single European currency has made eurozone exports more expensive to the USA and other economies whose currencies are linked to the weak US dollar. Still, this did not stop Greek merchandise exports, excluding oil and ships, which expanded 4.8 percent in 2007 compared to a year earlier and 12.0 percent in 2006, as they mostly head toward eurozone and developing Central and Southern European countries. Still, this strong export growth did not offset corresponding imports which rose by 12 percent in 2007, widening the country’s trade deficit. The role of oil in shaping Greek macroeconomic developments should not be underestimated. According to EU statistics, the Greek economy is not only oil dependent, it is also more energy intensive than the other eurozone countries and the EU-25 average. Although energy intensity, defined as the ratio of GDP to energy consumption, has declined in the last few years, most sectors of the local economy are spending more money on energy than ever before. Negative for growth In addition to the price, the higher volatility of oil prices appears to have had a negative effect on economic growth because of the uncertainty it creates, driving businesses to postpone or cancel investments such as building plants or buying equipment, according to studies. Hopes that these adverse developments on the oil front will lead to new initiatives to make the Greek economy less oil dependent and more energy efficient have yet to materialize, although history has taught us that it takes years and perhaps a shock along the way for this to happen. Although the exact impact of higher oil prices on Greek inflation and output has not been quantified, it is logical to assume it add a few points to inflation this year and shave fewer off of GDP growth. This will be even more significant if higher oil prices keep the European Central Bank from cutting its key interest rates this year despite signs of much slower growth in the 10-trillion-euro economy. It should be remembered that Greece’s gross domestic product (GDP) grew by 4.0 percent in 2007 based on preliminary figures, extending its streak of outperformance vis-a-vis its eurozone partners to 12 years. The economy posted strong gains to the tune of 4.2 percent in 2006 after 3.8 percent in 2005, 4.6 percent in 2004 and 5.0 percent in 2003. Admittedly, this is an impressive performance that has brought Greece’s per capita GDP, that is the share of GDP corresponding to each citizen of the country, closer to the average per capita income in the eurozone. However, the good 2007 figure cannot mask the fact that growth was on a decelerating path in the second half, falling to an annual rate of 3.6 percent in the fourth quarter of 2007 after expanding 3.8 percent in the third quarter and 4.1 percent in the second quarter. Lower public investment Of course, it is somewhat comforting that the slower GDP growth in the last three months of 2007 was partly due to lower investment spending by the government, as was pointed out by economists at Alpha Bank. Still, the combination of persistent high oil prices along with higher lending rates and savings rates, which discourage consumers from spending more of their income on goods and services, is not a good omen for Greek consumer and business confidence. All in all, it is likely the Greek economy may get hit harder than was earlier assumed by the credit crunch and slower economic growth in different parts of the world due to persistent high oil prices. Whether this will drive GDP growth to 3.5 percent or 3.3 percent, as some senior bankers are saying in private, remains to be seen. However, things look worse at this point than they did just a few weeks ago.