Growth outlook remains upbeat
The Greek economy is slowing down to growth rates its eurozone partners would have dreamed of and this is largely due to strong consumption spending. Can the international credit crisis and sticky high oil prices undermine Greek consumer spending? Not likely. The US payroll shrank for the third month in a row in March, according to official figures, a clear signal that the largest economy of the world is already in recession. Whether this translates into negative gross domestic product (GDP) growth or simply anemic growth to the tune of 1.0 percent makes little difference. Its impact is already felt by European companies with US operations, and the majority of analysts think it is just a matter of time before it shows up on the 10-trillion-euro eurozone economy. That’s why some are insisting the European Central Bank will have no choice but to cuts its key policy rate to 3.75 percent from 4.0 percent at present in the second half of the year when eurozone inflation is expected to subside. Having smaller trade and investment links with the USA, the main channels through which the Greek economy could be affected by the credit crunch are the increase in lending rates, the strong euro, the potential acute deceleration of GDP growth in some of its eurozone partners and the especially high world oil, food and metals prices. Even so, consensus wants the Greek economy to grow by 3.5 to 3.8 percent this year, compared to 2.0 percent or lower for the rest of the eurozone. If this indeed turns out to be the case, Greece will be able to close even more the gap in GDP per capita with its eurozone peers. This is even more so in PPP-terms, which account for changes in purchasing power, where Greece has made strides, even closing in on Italy which has stagnated in the last few years. It should be noted that Greek per capital income grew by more than 4.0 percent during the 2004-2007 period, compared to 1.7 percent in Germany, 1.4 percent in France, 0.5 percent in Italy, 1.9 percent in Spain and 3.1 percent in Ireland. This was not the only time Greece outperformed its trading partners. Between 2001 and 2003, it grew by 4.1 percent according to IMF figures, while Germany grew by a mere 0.2 percent, France by 0.6 percent, Italy by 0.5 percent, Spain by 1.9 percent and only Ireland came close by increasing its per capita income by 3.9 percent. Ireland and Spain beat Greece during the 1996-2000 period, since they grew by 8.5 percent and 3.5 percent, respectively, compared to 2.8 percent by Greece. Still, the local per capita GDP, that is, the portion of its economic pie which corresponds to each of its residents, advanced by 2.8 percent, compared to Germany’s 1.8 percent, France’s 2.4 percent and Italy’s 1.8 percent. The fact that Greece has lagged behind its eurozone partners in economic wealth is due primarily to its poor economic performance from 1981, when it became a member of the European Community, to 1993. But Greece’s ability to outperform handsomely its eurozone partners in 2008 and the next few years depends on the ability of its citizens to continue to spend more on consumer goods and its businesses to invest more. The first indications on consumer spending, which has grown by 3.0 percent or more after taking into account inflation during the years of outperformance vis-a-vis its core EU partners, are encouraging. The volume of retail sales grew by 3.4 percent year-on-year in January, decelerating from the excellent 6.0 percent registered in the first months of 2007. The deceleration is not surprising if one takes into account the hefty price hikes in certain food items and liquor. Stagnation? The key question is whether the expected slowdown will continue toward stagnation, which could have an immediate impact on economic growth. Although one cannot rule out a deterioration in economic conditions outside Greece in a prolonged credit crunch, the chances are in favor of the Greek growth story. There are reasons for that. First of all, the hefty wage increases in the private and public sector. Although it is not easy to quantify them, especially in the public sector because of the numerous other benefits, it cannot escape anybody’s attention that the wage bill in the 2008 budget is projected to rise by 8.6 percent and the pensions bill by 8.9 percent. Add to that the average increase of 6.2 percent in wages in the private sector after 5.4 percent in 2007 and it is easy to conclude that incomes policy is generous enough to support consumer spending to the tune of 3.0 percent or more in real terms this year. The expected growth of 16 to 18 percent in consumer credit should also be supportive. Optimistic expectations by businesses in the retail sector also support this view. High inflation on the heels of high world commodity prices and applied tighter lending criteria by banks, which already are charging wider spreads on new loans, and lower tourist receipts may offset some of the positive effects of consumption on GDP growth. The same may be true of falling stock prices and steady residential prices. All-in-all, the odds are still in favor of Greek consumers riding this storm out relatively unscathed, boosting the Greek economy to yet another year of strong growth, although slower than initially thought, with higher inflation being the price to pay.