Tuesday, April 12, 2011

Greece’s GDP in 2010

In 2010, Greece’s GDP fell from €235 billion to €230 billion, a 4.5% decline in real terms, marking the country’s worst recession since 1974. If GDP falls by another 3%, as forecasted in the government’s budget, then it will end up at around 2005 levels. In this post, I want to disaggregate the decline in output and understand its main drivers and characteristics.

Before dissecting the numbers, I want to recall an earlier post dissecting Greece’s growth record since 2001 (see here). That analysis had led to these conclusions: (a) Greece needs to correct its massive current account deficit; (b) investment is too low; (c) employment in agriculture remains too high given sectoral output; (d) industrial production is below other European countries; and (e) an over-dependence on wholesale trade exposes Greece to over-cyclicality in output. In reviewing the GDP record of 2010, it is important to ask whether 2010 amplified or helped correct these trends.

In 2010, GDP fell mainly due to a drop in government spending and investment. A shrinking trade deficit contributed positively to output, while private consumption remained flat. For the most part, these trends followed earlier patterns. A lower trade deficit boosted output in both 2009 and 2010, although the deficit was still the highest in Europe. Investment fell in both years as well, but less so in 2010 than in 2009. Consumption, the main driver of growth over the last decade, fell in 2009 and was flat in 2010. Only government spending registered a major reversal, switching from growth to a decline in 2010.

These trends are no surprise: a recession should shrink spending and it should also help narrow trade imbalances. Yet the continuous drop in investment is worrisome. In 2010, Greece’s investment share of GDP was the second lowest in Europe after Denmark. To reach this position, Greece has seen a steady decline in investment since 2003: in that year, Greek investment was 25% above the European average (as a % of GDP); in 2010, it was 21.5% below. In nominal terms 2010 investment was below 2001 levels; in real terms, it was 24% down. The collapse in investment is a major challenge that the country will need to reverse.

Looking at investment more closely reveals the following dynamics. Most of the volatility in investment comes from housing and from metal products and machinery: housing investment peaked in 2006 and has since fallen by more than 55%, while metal products and machinery investment peaked in 2008 and has since declined by 36%. Other constructions and transport equipment have both seen peaks and troughs that have left them at roughly stable levels in nominal terms.

Finally, the numbers at the industry level show that agriculture, industry and financial intermediation and real estate all grew in nominal terms in 2010, although their growth was meager (0.1% on average). Almost 60% of the decline came from public services (which was down -8%), while the rest of the drop came from trade, including tourism and transportation (-2.8%), and from construction (-12%).

Putting all these numbers together reinforces the picture that I sketched out in the past: Greece’s trade deficit, at 8.5% of GDP, has fallen but remains very high, while investment is not just low but in fact collapsing. The combination of a necessary decline in government spending with the high exposure to cyclical business (travel, wholesale trade) amplify the country’s economic decline.

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