Since ELSTAT released the GDP figures for 2014Q4 recently I ‘d like to take the opportunity for a few quick comments on the Greek economy.

According to available seasonally adjusted data, Greek GDP decreased 0.4% during 2014Q4 (compared to the previous quarter). a larger movement than the 0.2% figure available in the first flash estimate. Compared to 2013Q4, it increased 1.3% compared to 2013Q4, lower than the initial 1.7% estimate. Overall, during 2014 Greek GDP registered its first increase in volume terms with a growth rate of 0.77%. Nevertheless, nominal GDP decreased significantly from €182.4bn to €179.1bn (a loss of 1.84%), implying a very large GDP deflator change of -2.61%. As a result all debt figures (which are calculated in terms of GDP) continued deteriorating during 2014. Given the ongoing deep deflation (inflation is -2.8%) it is quite possible that even a material increase in the GDP growth rate during 2015 will not be reflected in an actual increase of  nominal GDP.

Looking at the income method in current prices what is evident is the substantial increase in compensation of employees during the second half of 2014 (compared to 2013) with the seasonally adjusted figure (table 5) increasing 3.2% from €29.3bn to €30.2bn. Gross Operating Surplus on the other hand registered a significant fall from €49.84bn to €46.36bn (-7%). A large part of the fall appeared in an increase in taxes on production and imports which increased from €11.96bn to €14.18bn (+18.5%). The increase in compensation is highly important since it signals an improvement in employment (given that wages are falling or stagnant). On the other hand, the large fall in GOS (of the order of €3.5bn in half a year) is not a positive sign, especially since a large part of the fall was reflected in higher tax incomes (which increased €2.2bn during the same period).

Table 7 (which shows the chain-linked volume changes compared to the same quarter of the preceding year) paints a similar picture in terms of the tax burden with taxes on products (production method) increasing close to 7% during 2014H2. Positive signals are:

  • The stable increase in private consumption during most of 2014.
  • The almost double digit increase in exports (with the growth driven mainly by services exports) and
  • The impressive growth (+17.9%) in gross fixed capital formation during 2014Q4, especially compared to the fact that fixed investment was decreasing until 2014Q2. As long as this pattern continues it will signify a shift towards higher investment and eventually allow net investment to also become positive (and increase the Greek economy capital stock). Nevertheless, looking into the detailed breakdown of investment one will notice that the large increase was the result of a substantial (one-off?) growth of transport investment during 2014Q4 which probably reflects new ships. Construction is still in negative territory while equipment investment is only slowly starting to gain momentum.

Overall, the GDP figures provide both positive and negative signs. The large tax burden and the fall in GOS are obviously negative while the increase in labor compensation and fixed investment can become drivers of economic growth in the future (along with exports). The persistent and strong deflationary forces are the most important negative factor since they make debt stabilization a daunting task and create the need for further austerity measures.

Given the latest Greek government debt figures (2014Q3 – €315.5bn), government debt is now 176.2% of GDP. Just for comparison, the latest program review by the IMF (June 2014) was projecting 174.2% (table 1) with a nominal GDP of €181.9bn and a GDP deflator of -0.7%. If the projected figure of nominal gross debt for 2014 is reached (€317bn), then debt will reach 177%. Given the ongoing deflationary dynamics in the Greek economy it is quite probable that the ongoing negotiations about the completion of the program review between the Greek authorities and the ‘institutions’ will quickly reach the conclusion that the debt sustainability analysis is obsolete.