Greece: Economic&Market Analysis - October 2011

  • 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.
Greece: Economic&Market Analysis - October 2011
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