Greek Economy Contracts More Than Originally Feared in Q3

Detailed figures released by the National Statistical Service (NSS) show that Greek GDP contracted by more than originally estimated during the third quarter of 2010. Specifically, GDP is now said to have fallen by 1.3% quarter-on-quarter (q/q) during the July-September period. A "flash" estimate released last month had put this contraction at 1.1% q/q. This follows revised falls of 1.7% q/q in the second quarter (changed from - 1.8% q/q) and 0.6% q/q during the first quarter of the year (previously put at -0.8% q/q). Indeed, the third quarter was the ninth consecutive quarter of contraction. Consequently, GDP declined by 4.6% year-on-year (y/y) in the third quarter, which is the largest y/y fall since the economy started to contract on an annual basis during the fourth quarter of 2008.

Dire domestic demand levels were the main drag on activity during the third quarter. On the other hand, net exports made a positive contribution to the total change in demand, although this was the result of a sharp fall in imports.

Domestic Demand and Imports Plunge

Private consumption, which represents around 70% of the Greek economy, plunged for the second successive quarter. Its fall (of 1.8% q/q) moderated vis-à-vis the plunge in consumption during the second quarter (of 6.4% q/q), although it has to be noted that the bad performance during the April-June period was partly a correction to a stronger-than-expected first quarter (when consumption rose by 2.0% q/q). It is clear that the current recession is hitting consumers particularly hard. They are facing increasing taxes—including a higher value-added tax (VAT)—as well as cuts in public spending, a reduced availability of credit for consumption, and a very weak labour market. Unfortunately, all of these factors are expected to remain in place during the coming quarters, which makes the outlook for consumption a gloomy one. Given the large fiscal adjustment the economy has to go through, IHS Global Insight believes that private consumption will be extremely subdued over the medium term.

At the same time, gross fixed capital formation also contracted markedly during the third quarter. It went down by 4.4% q/q, following a fall of 9.5% q/q during the previous quarter. Investment has now waned for seven consecutive months. In y/y terms, capital formation plunged by 20.0%, down from a fall of 18.1% in the second quarter. This annual contraction was driven by sharp falls in investment in transport and machinery equipment, which plummeted by 33.2% y/y and 25.4% y/y, respectively. Investment in dwellings went down by 17.1% y/y, while investment in construction assets (other than residential) fell by 10.4%. Similar to our view on private consumption, we do not expect a significant recovery in investment spending over the coming months. There are large spare capacity levels in the economy and firms are not only facing very weak demand but are also extremely concerned about the prospects for the economy. Credit conditions will remain challenging for a significant period, while the housing market is also expected to remain in the doldrums over the medium term. All of this leads us to believe that investment will continue to contract next year, although the pace of the quarterly contraction may not reach its second-quarter trough.

Somewhat surprisingly, government consumption increased by 7.9% q/q during the third quarter, although it went down by 4.7% y/y. The figures also show that the change in inventories, combined with a statistical discrepancy, was a major drag on growth during the third quarter.

Exports went down by 6.2% q/q during the third quarter, following a fall of 3.9% q/q during the second quarter. However, imports contracted for the seventh quarter in a row and by a sharper 7.5% q/q. Greece's export performance is certainly worrying, especially taking into account the recent appreciation of the euro and the expected slowdown in global activity. Tourism, one of the main sources of income, is being hit by the negative image of the country abroad as a result of the continuous strikes and demonstrations taking place. Monthly data show that income stemming from the shipping industry, another of the main sources of exports of services, has been quite healthy since the second quarter of the year, although this is also likely to decelerate if global activity moderates as expected.

Unemployment Jumps in September

The NSS has also published September's unemployment rate, putting the jobless figure at 12.6%. This is significantly above a reading of 9.1% during the same month of 2009. Employment fell by 211,349 (or 4.6% y/y), while the number of unemployed jumped by 170,912 (or 37.4% y/y).

Outlook and Implications

Although still above our original estimate for the quarter (mainly thanks to the surprising increase in public spending), these figures illustrate the difficult situation in which the Greek economy finds itself. However, the most worrying thing is that the outlook does not look much rosier. Indeed, it is very difficult to see where growth will come from. As previously mentioned, domestic demand is expected to be under significant pressure over the medium term, mainly as a result of the sharp adjustment in fiscal policy and the internal adjustment the economy has to go through in order to improve its external competitiveness. In normal circumstances, exports would be expected to lead the recovery, but the export performance of the economy has been really disappointing and is unlikely to improve dramatically in the short run. Short-term indicators suggest that the economy is continuing to contract during the final three months of the year, although the pace of contraction should ease somewhat, but the real worry is that activity is likely to be extremely weak over the medium term too.

What do these figures mean for the government's fiscal plans? We expect that the revision to the third-quarter figures will drive government bond yields up in the short term. However, the contraction for 2010 as a whole is likely to be in line with the projection used by the government in its budget (-4.0%). Moreover, the budget for next year sees GDP contracting by 3.0%, which we believe is a reasonable estimate at this point in time. However, we do not believe that, in the long term, fiscal adjustment without growth will be possible.