Continuing on the path of the series on the Greek macro crisis I will focus on gross capital formation during the Euro era in more detail, especially in connection with imports of goods. First, let’s start with a breakdown of investment in main sectors since 1990 (as %GDP and not including inventory changes):

Greek Sectoral Gross Capital Formation 1990 - 2011


It is quite evident that dwellings are the principal component of investment, especially during the early times of the 1990’s. This component displayed a large drop in the early 1990’s from 16% to 10% GDP where it settled for the greatest part of the following years with small changes. Only during a very short period in 2006 – 2007 did it climb momentarily to 12.5% GDP. So it seems that no housing investment boom actually happened in Greece after the Euro, although house prices did appreciate significantly. The rest of the investment components show quite steady figures. Transport equipment (which includes shipping) displays significant fluctuations while equipment was stable around 4% of GDP with the exception of 2007 – 2008 when it increased to 4.5 and 5%.

Looking into the figures since 2008 makes the depth of the depression very clear. Dwellings construction dropped from 12.5% in 2008 to 4.7% in 2011 and is projected to reach 4.3% in 2012. Equipment investment went from 5% in 2008 to 3.2% in 2011 and other buildings and structures (which include public works) from 4.6% in 2009 to 3.2% in 2011.

Overall, the deepest drop has been in dwellings, a loss reflected in construction employment as well which has lost more than 170,000 workers (from around 400,000 in 2007). This figure alone accounts for a loss of 8.2% in GDP, more than half  the cumulative 2009 – 2011 drop. Most of the components have now settled to such low figures that just basic capital stock maintenance will allow for these levels to be preserved. As a result, investment (and output in the aggregate) will stabilize mainly due to the ‘zero level bound’.

Relation with imports

What I ‘m interested in this post is how investment components relate to imports of goods. For this reason I will use Bank of Greece balance of payments data to construct imports of goods excluding fuels and ships (as %GDP). Since data availability is thin, only the 2003 – 2011 period will be examined.

Since these are time series data, the first action is to determine which are stationary through Dickey-Fuller unit root tests:

Greece investment components unit root


* I(0) stand for stationary and I(1) for stationary by taking first differences.

As it turns out, the components are not stationary. Transport equipment was not included since imports do not include ships. Trying to determine a suitable regression relationship leads to the observation that most of the components do not appear to be highly significant. One simple yet robust relationship is the following:

Greek investment import regression


* denote 90% confidence interval, ** 95% and *** 99%.

Changes in Equipment and dwellings investment during the previous year are able to explain a large part of the current year change in imports. Both coefficients are large, while the equipment one is also negative, meaning that an increase in equipment investment during one year will lead to a drop in imports during the following one.

Based on the above coefficients we can examine the exact magnitude of the effect changes in investment (in these two sectors) had on imports during 2008 – 2011 (including 2008):

Greek investment imports effect


The total effect was very close to the actual change and explains almost 90% of the total change with dwellings playing a key role. Assuming the Greek economy returns to growth and the above relationship is linear on the upturn as well, going back to long-term figures of 10% for dwellings and 4% for equipment  will lead to an increase of imports equal to 2.8% GDP or close to 3/5 the total drop during 2008 – 2011. A recovery will need to be much more focused on equipment investment (and manufacturing in general) rather than constuction (with the corresponding structural effects on employment) for imports not to increase as much.