The Eurozone flash National Accounts estimates for the fourth-quarter 2016 was released yesterday by Eurostat – GDP up by 0.4% in the euro area and by 0.5% in the EU28. The annual growth rate for the Eurozone in 2016 was 1.7. The news also indicated that the Greek economy fell back into its Depression and was followed by the other basket case, Finland. Both recorded negative growth in the December-quarter, Greece -0.4 per cent, Finland -0.5 per cent. Both results reflect the on-going fiscal austerity. Spain, on the other hand, allowed by the European Commission to run large structural deficits (to keep the PPP in power) recorded another strong growth result. Perhaps if Syriza had demonstrated some spine, they too could have got away with the Spanish solution – where Brussels turns a blind eye to the blatant breach of the Stability and Growth Pact rules, while its economy starts to growth strongly. But, then history tells us that Syriza caved in almost immediately and the continued decline of the Greek situation is a direct result of the policies they were then co-opted to inflict on their own people. Deeper analysis of the Greek situation reveals how dire the future is likely to be. I present a few indicators of that future in this blog. As the neo-liberal colony of Greece takes another step backwards, it isn’t hard to understand why? Basically, the Troika conspired to destroy the prosperity of Greece as a nation and its political leadership joined that conspiracy by refusing to broach an exit from the Eurozone. Simple really.
The seasonally adjusted data for Greece shows that:
- Real GDP contracted by 0.4 per cent in the December-quarter 2016.
- Annual growth for the year to December 2016 was a modest 0.3 per cent.
The following graph is taken from the Greek National Statistics Office bulletin released yesterday (February 14, 2017) – Quarterly National Accounts, 4th Quarter 2016 (Flash Estimates).
These estimates were the so-called ‘Flash Estimates’ and will be subject to revision as more data comes in. At this stage we only have the headline figure and so a detailed analysis of expenditure patterns and contributions to growth will have to wait until the next data release.
The Financial Times headline – Greek economy suffers surprise fourth quarter contraction (February 14, 2017) – suggests the journalist has been caught up in the hype of the positive forecasts.
The article said that:
The Greek economy suffered a surprise contraction at the end of last year, reversing tentative signs of sustained growth and inflicting a fresh blow on the hopes of its international creditors …
Greece’s EU creditors have championed the return of economic growth in 2016, heaping praise on the Syriza government’s efforts to boost its public finances through higher taxes and reduced spending. Brussels expects the economy to bounce back strongly this year to expand 2.7 per cent from just 0.3 per cent in 2016, contingent on success in its bailout talks.
Yes, those optimistic EU creditors and all the cheer squads in Brussels, Frankfurt and Washington, who live a life of delusion.
The FT article also notes that while the IMF has acknowledged that “a six-year austerity project has seen it … [Greece] … suffer an economic contraction worse than the US Great Depression”:
The IMF is now demanding Athens legislate for around €3.6bn in additional tax and pension reforms as its condition to stay involved in the bailout …
It is as crazy as it reads.
Surgeons only know one thing, the same goes for these neo-liberal infested international organisations. They should be scrapped.
I guess the European Commission will be surprised
… trapped as they are in their own hype and neo-liberal Groupthink.
The following graph (apart from being very nice to look out) shows the iterative nature of European Commission forecasting for real GDP growth in Greece, starting with the Autumn 2009 forecasts.
The thick blue line is actual real GDP growth.
So to interpret the graph start with the Autumn 2009 forecast. It projected that real GDP growth in Greece for 2009 would be -2.9 per cent, but then growth would return in 2010 (0.6 per cent) followed by stronger growth in 2011 (1.5 per cent).
The actual performance over those three years was -4.3 (2009), -5.5 (2010), and -9.1 (2011).
The divergence in what the European Commission thought would happen as it was beginning to bully Greece to impose fiscal austerity, and what actually happened is stark beyond belief.
And in the next two years the Commission was similarly in error, although you can see how its revisions were becoming slightly less optimistic as the crisis deepened.
By 2013, the Commission was getting closer to reality although it was still predicting in 2014growth in 2015 to be 2.9 per cent, when the actual was -0.2 per cent – still the errors were smaller.
The 2.7 per cent prediction seems to be popular in the European Commission forecasting unit. For the last two years it has been predicting that Greece will record that growth rate this year.
With the December-quarter contraction, it would be brave person who would suggest that Greece will grow by 2.7 per cent this year.
Investment has collapsed
The quarterly national accounts data from the Greek National Statistical Authority (El.Stat) provides quite detailed data on Gross fixed capital formation by asset type.
The following graph shows indexes from the September-quarter 2007 (the peak – index = 100) to the September-quarter 2016 for all gross fixed capital formation (investment spending) and the sub-category dwellings.
For the 9 years shown, total investment has gone from 100 to 32.4 while dwellings investment has gone from 100 to 3.7. Yes, you read that correctly.
Investment in housing stock has shrunk by 96.3 per cent.
Investment in transport equipment has gone from 100 to 12.2 index points. Investment in ICT has gone from 100 to 54.4 index points. Other machinery and equipment from 100 to 61.3.
It is almost impossible to envisage how a government could allow this to happen unless it had lost all authority and an external force, with no long-term vested interests in the welfare of the nation were running the show.
Which, of course is exactly what has happened to Greece. The IMF officials who swan in an out, bullying Greek government bureaucrats have no stake in Greece. The European Commission officials have no real stake.
They will retire on luxurious pensions to some where having left behind a total disaster for the Greek nation.
Even using the term nation in relation to Greece is a misnomer these days. They might still wave the flag but for all intents and purposes they have been colonised by the neo-liberals to the north of them.
In yesterday’s blog – US labour market deteriorating – the losses from GFC will be long-lived – we compared the time paths of various Potential real GDP series for the US to show how recession impacts and via its effect on investment spending (capacity building) leads to long-run negative consequences if allowed to persist.
The lesson was clear – the longer the recession lasts and the weaker is any subsequent recovery is – the more is the likelihood that gross capital formation will deteriorate significantly, which then reduces the long-run growth potential of the nation.
The costs of the recession then multiply and resonate for generations.
Any recession is bad and the income losses are permanent. But a standard V-shaped downturn that sees the economy deteriorate sharply but then recovery just as quickly tends not to create these long-lived hysteresis effects (which I explained in yesterday’s blog).
But a deep and long recession followed by a weak, drawn out recovery is a disaster and leads to the sort of investment profiles shown in the previous graph.
Although, I have to say, the Greek experience is extreme. I cannot recall an historical pattern like this.
A deliberate destruction of a national economy.
The shrinking future for Greece
I did a similar exercise for Greece (as was discussed in yesterday’s blog) which is shown in the following graph. One has to do several calculations to build a (relatively) consistent data set.
I used the IMF World Economic Outlook (WEO) data because you can still get archived databases. Be warned though, that the IMF estimates of output gaps are typically biased downwards (too small) because their concept of full employment maintains unemployment rates that could be reduced further without inflationary consequences with proper job creation programs.
But we will use them as the benchmark, keeping the bias in mind.
I computed three times series from 1995 to 2016:
1. Potential real GDP using the 2016 WEO output gap estimates (then reverse engineering them to get potential).
2. Potential real GDP using the 2009 WEO output gap estimates – so what the IMF thought the output gaps would be before the full impact of the GFC occurred. I couldn’t go back to 2007 because there are no output gap measures for Greece at that time.
3. Potential real GDP based on a simple linear extrapolation of the annual real GDP growth rate between 1996-2007 to give some idea of what would have happened if the GFC had not occurred and the Greek economy had have continued to growth beyond 2007. The extraploation begins in 2008.
I had to adjust the IMF-based series to make the constant price base the same (2000 prices converted to 2009 prices for the 2009 WEO estimates) and extrapolate the last three years.
All times series were indexed to 100 at 2007.
None of these data manipulations introduce anything spurious into the analysis. Applied economics is a lot of approximation anyway.
The results are shown in the following graph. The lines correspond with the time series explained above with the actual real GDP index (blue) included.
The results are:
1. Real Greek GDP has shrunk by around 27 per cent (using WEO data) since 2007.
2. If the economy had have maintained its average real GDP growth rate between 1996-2007 then real GDP would have moved out along the green line. We might assume that potential real GDP would have been within that vicinity (depending on the growth rate of investment).
By 2016, the real GDP loss relative to the green line scenario was 168 billion euros (which scales to 67 per cent of the real GDP achieved in 2007).
3. The purple line tells us where the IMF thought potential real GDP would move as time passed (remember this was based on estimates 2 years into the crisis – so pessimism was already being reflected in the estimates).
4. The red line is the current IMF estimate of potential real GDP (as at October 2016) and shows how the Depression that Greece has been enduring for more than 8 years has damaged its long run potential.
If these estimates are close to be the fact then the Greek economy hits full capacity if it expands by 10 per cent of its current size – remember its actual contraction has been around 27 per cent.
So national income will be much lower for many years to come – which is why the IMF has claimed unemployment will remain above 10 per cent until at least 2050.
Remember also that a 1 per cent growth rate in 2017 generates a lot less total extra income than 1 per cent growth in 1995. In 1995, 1 per cent growth would have generated 2.51 billion euros (in real terms) while in 2016 it generates 1.85 billion euros, such has been the contraction in the Greek economy.
So when European Commission and IMF officials are shouting about Greece returning to growth, the base from which that growth is emanating from is around 28 per cent smaller.
Basically, the Troika conspired to destroy the prosperity of Greece as a nation and its political leadership joined that conspiracy by refusing to broach an exit from the Eurozone.
Without the euro, Greece could have returned to growth immediately and sustained that growth without having to endure these crippling capacity contractions which will damage its future generations far into the future.
That is enough for today!
(c) Copyright 2017 William Mitchell. All Rights Reserved.