Tourism to play key role in next growth figures after negative Q2 economic data

The larger-than-expected drop in Greek gross domestic product (GDP) in the second quarter brought back concerns about the depth and duration of the recession and its impact on the Greek fiscal consolidation plan. The question is whether these concerns are well-founded or perhaps a bit exaggerated. The Greek economy shrank 1.5 percent in the second quarter compared to the first quarter, surprising on the downside since the market consensus had put the drop at 1.1 percent. Greece found some solace in the experience of Spain, which disappointed but to a much lesser extent, since its economy shrank by 0.2 percent on an annual basis. This contrasted with a much better-than-expected performance by Germany, which saw its economy grow 2.2 percent in the second quarter compared to an expected 1.3 percent. Some Greek government officials saw the nation’s numbers in a more positive light, pointing out that the real GDP was down 2.9 percent in the first half. Therefore, the economy would have to contract by 5.0 percent in the second half to shrink by 4.0 percent in 2010 as projected in the fiscal program agreed to with the European Union, International Monetary Fund and the European Central Bank. This idea is being reinforced by the fact that the Greek economy did very badly in the last quarter of 2009 and therefore the comparison will be more favorable this year. So, the only open question concerns the behavior of the economy in the third quarter, which is heavily influenced by tourism. Undoubtedly, this approach has some merits although it ignores the fact that changes in methodology render year-on-year GDP growth calculations shaky, as pointed out by the Hellenic Statistical Authority. According to the same line of thought, Greece’s nominal GDP, which is used in the denominator to calculate the country’s budget deficit and public debt ratios, will do better than projected because the annual change in the real GDP will be in line or smaller than 4.0 percent while inflation will average at 4.5 percent or higher. Since changes in the nominal GDP incorporate both the change in the real GDP and the change in inflation, it should come in slightly positive in 2010. This contrasts with a drop of more than 2.5 percent foreseen in the program and therefore will provide some breathing space for the government to meet the budget deficit target of 8.1 percent of GDP this year despite some slippage in tax revenues. One may call this the optimistic approach, or the opinion shared by the government and the economists of some local banks. The latter flesh out the argument of a smaller-than-projected drop in the real GDP by pointing out something else: They argue the economy should get a boost in the second half through the speedier implementation of the public investment budget (PIB). The expenditure of the PIB was cut to 9.2 billion euros from the 10.5 billion envisaged earlier to help attain the budget deficit reduction goal. To reach the new lower goal of 9.2 billion euros, some 5.0 billion will have to be spent in the second half of the year, facilitated by more than 3.0 billion euros in EU funds. With exports up 2.5 percent year-on-year in the January-July period and imports down 17.7 percent, the economy is already receiving a boost from the external sector. Along the same lines, other bankers say there are a few sectors of the Greek economy that are doing just fine but have escaped the attention of the media and the general public. They point to the strong demand abroad for exports of fresh fruits, i.e. to Russia, and a sizable increase in exports from the sector of aquaculture, among others. To make their point, they add that if investment spending picks up, aided by the implementation of the PIB, in the second half, the economy should contract by about 3.0 percent in 2010 even though consumption spending may fall by 3.0 percent in real terms. All these are fine arguments and may end up being correct after all but those who pay attention to the dynamics of the Greek economy do not share the same view. They agree the second quarter was a very bad for the Greek economy because almost everything came to a standstill, as the specter of a sovereign default weighed in. So, a rebound in consumer and business psychology had been due in the third quarter. However, they point out that the restrictive fiscal measures taken, such as sizable tax hikes, cuts in salaries along with a rise in unemployment, will hurt incomes and consumption as time goes by. Assuming a drop of 10 percent in tourist receipts compared to last year and a further downward adjustment in consumption spending by households, the contraction of the real GDP will be sizable in the third quarter, fanning further concerns about Greece’s ability to meet its fiscal targets. They also say the state does not pay the money owed to its suppliers, such as pharmaceutical and construction companies, and this contributes to the decline. Moreover, Greek banks either do not want to extend credit or cannot because they want to continue deleveraging and retain more liquidity since demand from their creditworthy customers is weak. So credit expansion to the economy will continue to slow the rest of the year, making it more difficult for some sectors and companies to grow or even survive, with their sales falling significantly. In this kind of economic environment, Greece will have to take more restrictive measures to ensure the attainment of the budget goal and therefore put more pressure on the real economy, entering a vicious cycle. Undoubtedly, one would hope the optimists are right about the numbers in Greece’s fiscal consolidation. However, it would be very unwise to ignore the arguments of the pessimists after the disappointing GDP figures in the second quarter. Therefore, it seems more prudent to wait to get further data on how the tourist industry did over the summer before jumping to any premature conclusion.