The underlying rebalancing of the Greek economy is ongoing -- and often overlooked -- as the requisite intensification of the fiscal adjustment effort and deteriorating private sector sentiment delay the bottoming out of economic activity to H2:2012.
Thus, the contraction of GDP in 2011 will amount to 5.9% y-o-y. Output will also decline in 2012 (-2.7% y-o-y), which reflects sizeable negative “carry” from 2011. The high dependency of economic growth on domestic demand during the past decade is reversing rapidly. As a result, imports have declined by 8% of GDP (real terms), while exports have recovered strongly, despite more competitive pricing by the tourism sector and a sharp decline in freight rates.
The current account adjustment has been slower than expected, due to significant adverse terms of trade effects, combined with pricing-to-market in tourism.
The labor market has adjusted far faster than expected, with large job losses in the private sector and a sharp fall in compensation.
The rapid adjustment in employment has also been accompanied by significant wage compression. Even after correcting for productivity, the competitiveness gap is closing rapidly.
Indeed, the cumulative fiscal effort over the 3-year period 2010-2012 amounts to an impressive 18 per cent of GDP. The vicious circle of fiscal contraction and recession poses an important dilemma to policymakers.