Consumption could hold thekey to the country’s recovery

The global credit crunch and the ensuing economic crisis will likely bring Greek economic growth to a standstill and may even push it into recession this year for the first time since 1993. Although things will get worse before they get better, the domestic economy may be able to weather the storm better than most of its EU peers, if consumers regain their confidence and the government behaves in a fiscally responsible way. There may be something wrong with the 88-percent gross domestic product (GDP) figure in Greece. The country’s GDP per capita, measured according to purchasing power parity, stood at 88.2 percent of the average GDP per capita in the EU-15, that is, the 15 core countries of the European Union, originally called European Community in 1980. That was a high point for Greece, because it fell to about 71 percent of the EU-15 average in 1996 for one good reason: The Greek economy grew by about 1 percent between 1980 and 1996 compared to more than 2 percent on average in the core EU countries. The situation changed completely from 1996 through 2008. The local economy outperformed its peers during this period, with the economy advancing by about 3.8 percent on average, compared to about 2.1 percent in the major EU countries. This brought the Greek average per capita GDP, measured in purchasing power units, to about 88-89 percent of eurozone’s GDP in 2008. Assuming the Greek economy stagnates or shrinks by about 0.5 percent in 2009 and the economy of the rest of the eurozone countries recedes by more than 1.5 percent, the country’s per capita income will continue to catch up with its peers. However, it is not sure whether the local economy will be able to recover fast enough to continue to outperform in the coming years given its high public debt-to-GDP ratio and the demands for a strict and painful fiscal adjustment required by the European Commission and its international borrowers. The painful adjustment is the result of years of complacency among policy makers, political parties, trade unions and the local press. Most of these groups have resisted calls for institutional reforms in public finances and the greater public sector to close the budget gap. Instead, they continued to complain that the governments in power were not spending enough and had not reduced taxes enough to help boost individuals’ net income. In so doing, they ignored the positive impact of strong economic growth on state revenues and spending, which helped bring the general government budget deficit to 2.8 percent of GDP in 2006 from 5.1 percent in 2005 and 7.5 percent in 2004. However, just a look at the so-called cyclically adjusted budget, which takes into account this positive impact and shows a more clear picture of the real fiscal stance, would have made it clear the country was on the wrong path, undermining its future economic growth. At this point, everybody agrees that tourism, an important industry, will determine whether the Greek economy will go under or stay afloat. In September-October, we will have a good idea of the actual outcome. However, there is another important factor that could have helped to pull the economy out of its slump in the last quarter of 2008 or the first quarter of 2009, and this is the Greek consumer. Facing a barrage of negative news in the press in Greece and from abroad, the average local citizen has scaled back on his purchases of goods and services, contributing to the sharp slowdown in economic growth. Still, unemployment, which is an important determinant of consumer behavior, has yet to be hit hard, with the exception of construction and related sectors. Even the car dealership sector, a small one, which was affected earlier, appears to be on its way to recovery following the tax-cutting measures announced by the government for car purchases. Provided unemployment does not climb to higher levels in the fall, tourism holds its ground and Greek consumers face consistently lower savings rates and cheaper borrowing for mortgage loans, it is easy to see that they would have to start spending part of their accumulated savings at some point down the road. All in all, one should not be surprised if consumers start ignoring all the doom scenarios late in the fourth quarter of 2009 or the first quarter of 2010 and produce a stronger economic recovery in 2010 than most anticipate at this point. Let’s not forget that consumption accounts for more than 70 percent of the Greek GDP and is powerful enough to turn things around and help close the budget gap.

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