Two sectors may help reduce the effects of the global crisis

The global financial crisis represents a serious threat to the Greek economy but the most significant threat may be the psychology of the average citizen, which has taken a turn for the worse in the last couple of months or so. The banking and the construction sectors may hold the key to putting the brakes on the slide. The Greek economy is now expected to grow by little more than 3 percent in 2008 and register 2.0 to 2.7 percent growth in 2009, based on consensus estimates, compared to an expected growth rate of around 1 percent or less this year and a bit more than flat next year overall across the eurozone. These are positive statistics but hide a deterioration in strength below the surface of the local economy. This is not surprising, given the dismal global economic and financial environment. However, it is somehow worrisome because the history of economic recessions has not been kind to Greece. In the last eight Greek recessions, from 1960 to 2007, the economy shrank by about 12 percent on average, which is two times greater than the mean Organization for Economic Cooperation and Development (OECD) country loss and three times the OECD country median loss, based on International Monetary Fund (IMF) calculations cited recently by Eurobank chief economist Gikas Hardouvelis. The average duration of a Greek recession, defined as the number of quarters between a peak and the next trough, is three-and-a-half quarters and is about the same as in the average OECD country. So it is important that the country avoids a recession because it may be steeper in loss of output and jobs than many envisage and may last longer. This is because of the country’s macroeconomic imbalances, and the limitations they pose to increasing government spending and cutting taxes to boost the economy. The biggest limitation is, of course, the appetite of international investors for government bonds. In order to avoid enduring the nightmare scenario of a severe recession and perhaps a longer period of stagflation, two key sectors to the local economy, that is, banking and construction, will have to be kept from going down. After all, one of the explanations for Greece’s relative resilience to the global financial crisis so far has been the robustness of the banking sector. The latter was not hit by the kind of writedowns in toxic assets experienced by banks in other countries. The rescue package of 28 billion euros heralded by the government may, however, not prove adequate to address their future problems if Greek and other economies in Southeastern Europe fall into recession – but will certainly help. It helps ease liquidity at a time when keeping credit flowing in the economy is crucial. Also positive is the expected new cut in the European Central Bank’s (ECB) key rate to 2.75 percent from 3.25 percent now. The latter may help another key sector of the economy, namely construction, which was among the biggest beneficiaries of the country’s high growth rate over the last few years. At this point, the large construction groups seem to be in good shape but some companies in the second-tier group are facing the specter of bankruptcy. Moreover, hundreds of smaller companies active in public works and residential construction are facing difficulties, although their actual situation may be better than depicted in the local press, due to the large profits they have accumulated in the past. To this extent, Greece will have to put more public works into play, pay companies for works completed and jump start projects under the public-private privatization initiatives to breathe life into a good portion of the construction sector. It will be more difficult to do something with private residential construction, where a lot depends on the unsold supply of new homes and private demand. Still, things may turn out to be better than can be seen at this point if local press reports of a large stock of unsold new homes prove to be wrong, as some bankers have suggested, and loan rates come down with the ECB rate cuts. The dynamics of the Greek economy point to further weakening ahead and history shows a Greek recession is more painful than that in the average OECD country and has to be avoided. Shoring up the banking and the construction sectors may be one way to do it, since these directly affect the average citizen’s psychology.

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