Monday, January 1, 2018

Greece In 2018 - A New Beginning

Happy New Year Hellas!
I strongly believe that 2018 will be a comeback year for Greece, a true New Beginning for a country coming out of an unprecedented seven years of economic misery.

In previous posts I have detailed the Greek Depression sufficiently, so I won't repeat the telling here.  For us financial markets types one chart is enough to capture the whole drama: 10-year government bond yields.

So, if the past is history, what lies in the future?

Again, charts.
  • The government's primary budget (i.e. before interest payments) is solidly in surplus at around 3%-3.5% of GDP, a huge and rapid improvement from a disastrous 9% deficit in 2013.

  •  The current account (trade balance, cross-border payments, etc) is now balanced, also up from very large deficits in prior years.
  •  Government debt has stabilized, albeit at high levels.  However, what matters most is the cost of servicing it, and that is the lowest in over a decade.

  • Employment bottomed out in 2013 and is slowly rising, nearing 2011 levels.  The increase is occurring in the absence of any significant upswing in construction activity, which is at the lowest level in decades (housing construction was Greece's main economic driver during the bubble years). Therefore, the current improvement is more structural than cyclical, so when construction revives employment will rise very fast.

  •  And what about headline GDP numbers? I confess that I am very dubious about them, since there are structural distortions which make accurate GDP measurement problematic. For example, Greece has a very large "shadow" economy: according to the OECD around 25-35% economic activity goes unreported, mainly due to tax evasion.  Even a minor fluctuation in this percentage can skew growth figures disproportionately, so it is better to look at alternative indicators. The next chart is a comparison between total energy consumption and real GDP. There are obvious divergent years: 2007-08, 2011 and, perhaps, 2017 as well - though it's still too early to tell. In general, I believe energy data are more accurate (yet, there is tax evasion in the fuels market, too, so...).  Maybe it is best to just look at trends instead of absolute figures. Either way, the Greek economy seems to be expanding once again in 2017 - and if I had to guess, faster than the GDP numbers are showing.
*(2017 data are up to 3Q for GDP and only for electricity for energy)
The official verdict for the extend of the Greek recovery is still many months away.  However, it is certain that after so many years of pain, Greece is making a new beginning.
It is no longer an unstable debt bubble economy. It is now based on a solid foundation of fiscal budgets in surplus, balanced current accounts, low debt service and rising employment.  Markets have taken notice, too - it is no accident that yields on 10-year government bonds are the lowest since 2008.
The New Year is looking rather good for Greece.

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