Greek Economy Continues Sharp Contraction in Q4

Non-seasonally-adjusted provisional figures released by the Greek statistical office show Greece's GDP contracting sharply during the fourth quarter of 2011. Output fell by 7.5% year-on-year (y/y) during the last three months of last year. This follows contractions of 5.0% y/y during the third quarter and 8.0% y/y and 7.3% y/y during the first and second quarters respectively. Therefore, the figures show the Greek economy waning by 6.9% in 2011 as a whole, following contractions of 3.5% in 2010 and 3.3% in 2009. The last seasonally adjusted figures released by Statistics Greece correspond to the first quarter of 2011.

Unsurprisingly, domestic demand was the main drag on the economy during the fourth quarter, while a sharp contraction in imports meant that foreign trade made a positive contribution during the period. Similarly, domestic demand was also the main reason behind the sharp contraction in GDP in 2011. Net exports made a positive contribution, although this was also the result of plummeting imports.

Private consumption waned by 7.1% in 2011, signalling the third year of contraction. Consumption levels last year were 11% below their peak in 2008. During the fourth quarter, household spending plummeted by 7.0% y/y, which was the strongest annual contraction in two quarters. Fiscal austerity, historically low consumer confidence and a dire labour market are having a devastating impact on consumption levels. Figures released by Statistics Greece earlier in the week help to illustrate perfectly the dire conditions currently in the labour market: the non-seasonal unemployment stood at 21.0% in December, which is the highest unemployment rate for the month on record. The number of employed fell by 7.9% y/y, while the number of unemployed jumped by 40.9%. More than half—51.1%—of persons in the 15 to 24 years age bracket were unemployed in December.

Amid this backdrop, it is not surprising to see investment spending performing abysmally. Real fixed-investment spending plummeted by 22.2% y/y during the fourth quarter and 20.7% in 2011 as a whole. Investment spending almost halved since the crisis started in 2008 and now only constitutes 15% of GDP—an extremely low level, not only by Greece's historical standards, but also compared to other Organisation for Economic Co-operation and Development (OECD) countries.

Disappointingly, exports contracted sharply during the fourth quarter. Specifically, they went down by 6.1% y/y, their sharpest annual contraction in two years. This led to a contraction of 0.3% in 2011 as a whole. Exports had risen by 4.2% in 2010 and fallen by 19.5% in 2009. On top of muted demand among key trade partners, Greek exporters are facing difficulties in obtaining trade credit, while the euro has remained relatively strong taking into account Greece's productivity levels. Meanwhile, plummeting domestic demand levels drove a sharp contraction in imports, which fell by 14.2% y/y during the fourth quarter and 8.1% in 2011 as a whole.

Inflation Eases in February

In other news, figures show consumer price inflation continued to moderate in February. The consumer price index, also released by Statistics Greece, rose by 2.1% y/y in February, following increases of 2.3% y/y in January and 2.4% y/y in December. Month-on-month (m/m), prices fell for the third month in a row, by 1.5%. The annual inflation rate is currently at its lowest level in six months. The main inflationary pressures in February came from housing costs, while transport costs and the price of food and non-alcoholic beverages also rose by more than average. On the other hand, prices of household equipment, recreation and culture, clothing and footwear and health costs all fell in February. Meanwhile, the EU-harmonised rate of inflation stood at 1.7% in February, down from 2.1% in January.

Outlook and Implications

These figures reinforce the view that the Greek economy is in free fall. Output has now contracted by around 20% from its pre-crisis peak, and things will get worse before they get better.

The strategy put in place by Greece's official creditors focuses on fiscal consolidation and structural reforms. The hope is that improving public finances and external competitiveness will lift the economy and achieve sustainable growth over the long run. The problem with this strategy is that structural reforms—although extremely important—are likely to take time to have an impact on the economy. In the meantime, fiscal austerity, historically low business and consumer confidence, and rapidly rising unemployment are driving sharp contractions in activity. This is not only making fiscal consolidation more difficult but it also risks eroding political and social support for the reforms programme. On top of being socially undesirable, sky-high unemployment levels will continue to keep private consumption under extreme pressure, dampening tax receipts. Moreover, extremely elevated youth unemployment will keep the social situation very volatile, and will also accentuate emigration from Greece of highly qualified members of the workforce ("brain-drain").

Given the lack of seasonally adjusted figures for 2011—and the fact that we now have a full year of non-seasonally adjusted data—IHS Global Insight has switched to the non-seasonally adjusted figures in order to produce its March forecast. The figures, due to be published later this week, will see Greece's GDP contracting by 5.6% this year, following a fall of 6.9% in 2011.