I started Grecology in 2020, after the Covid-19 pandemic had thrown the world into upheaval. Whatever plans any of us had at the start of that year didn’t last long, but at the same time Substack was taking off and offered interesting opportunities for writers. The pandemic was an economic crisis as well as a public health one, and after years of writing about the Greek economy for other publications, it was exciting to have a channel to build a relationship directly with readers.

My first post was about the Greece’s dependence on tourism as the government was pushing for people to return to the country after the first lockdown. The newsletter quickly settled on a regular Friday macro update. It was fun to watch Grecology grow, and through it I’ve formed connections with readers that have moved and meant a lot to me. Ending it feels like a big wrench.

But end it I must. An exciting opportunity came up which means I’m about to start a new job and a new chapter in my career. Unfortunately, this means that I can’t continue writing Grecology, so I am mothballing the newsletter.

I want to thank you, readers, for being with me on this journey. For those of you who took out paid subscriptions, or just shared the posts, I want to thank you for supporting my work. Billing will cease and I will issue pro rata refunds for the amount of time remaining on your subscriptions. These will take a few days to process, but the refunds will be on their way. There is no need to hit any “unsubscribe” buttons — you will just stop receiving emails as the newsletter becomes inactive.

Thanks for reading,

Marcus

The Bank of Greece this week released data for June that showed that travel receipts increased 23.9 percent in the first half of the year to 6.17 billion euros. Compared with the first half of 2019 — which was a record year for revenue from tourism — receipts were 14.1 percent higher.

Tourism revenue collapsed in the two-year period of 2020 and 2021 as a result of the pandemic, but recovered impressively in 2022 to come close to its record high. While there was also a healthy recovery in the number of visitors last year, this was a smaller rebound than for receipts. Instead, those tourists that came spent more than they did three years previously, with the average spend per visitor per trip amounting to 608 euros in the first half of last year, compared with 558 euros in same period of 2019.

For the first half of this year, visitor numbers also shot past their 2019 level — the number of arrivals were 7 percent higher than four years ago.

What is surprising is that the average spend per visitor has fallen in the first half of this year to 594 euros. This is particularly remarkable since these are nominal figures that aren’t adjusted for inflation. And while the inflation rate has been decelerating this year, it remains substantially higher in the tourist sector.

For people living in Greece, it’s been obvious that prices for holiday accommodation have soared this year. Last month prices for accommodation services were 6.5 percent higher than the same month a year earlier — and in April this rate reached as high as 21.8 percent.

Structural shift?

So this suggest that while the number of visitors to Greece is increasing, the profile is shifting towards travellers with tighter budgets. This is interesting because something that last year seemed like a statistical blip could in fact be a trend towards lower income segment of the market.

Average spend per visit plunged in 2020, the first year of the pandemic, but then surged to 681 euros in 2021. Given that Covid restrictions were still in place and visitor numbers were still extremely low that year, the obvious explanation was that those most able to take vacations abroad were affluent tourists who could spend more at their destinations. Last year’s drop from that elevated level seemed like it was just a normalisation of sector.

The fact that average spend continues falling this year — especially given rising prices — hints that either that normalisation is taking longer might be expected, or some kind of deeper shift is going on.

Other data

• Greece’s current account deficit in June was 638.2 million euros, compared with 842.2 million euros in the same month of 2022.

  • The trade balance (goods and services) moved into a surplus of 326.8 million euros, compared with a deficit of 295.4 million euros in June 2022

  • In the first half of the year, the current account deficit narrowed to 7.86 billion euros from 11.6 billion euros a year earlier

Next week’s key releases

Monday, Aug. 28:

• July bank lending and deposits (Bank of Greece)

• May building activity (Elstat)

Wednesday, Aug. 30:

• August economic sentiment indicator (European Commission)

• July producer price index (Elstat)

Thursday, Aug. 31:

• July unemployment (Elstat)

• June retail sales (Elstat)

Friday, Sept. 1

• August manufacturing PMI (S&P Global)

The latest consumer price index print showed a bump in the road in Greece’s rapid disinflation path in July. Prices grew 2.5 percent from the same month a year earlier — a jump from 1.8 percent in June.

For all that the headline inflation rate has fallen dramatically in recent months, the growth in food prices has shown little sign of abating. Food inflation remains well into double digits, increasing to 12.3 percent in July from 12.2 percent the month before. However, food’s overall contribution to headline inflation only increased by 0.1 percentage points to 2.6 percentage points.

The bigger factor was energy prices. These were instrumental in the initial surge in headline inflation — above the rate for the euro area as a whole — and then played an equally critical role in bringing inflation rate down as time wore on.

The energy effect, while still strong, is beginning to weaken. In June, energy subtracted 3.8 percentage points from the headline inflation rate, whereas in July this impact fell to just 3.4 percentage points.

Core inflation — which strips out both energy and food — also isn’t coming down as fast as might be hoped. After the rate of core price increases fell from 6.7 percent to 4.9 percent between May and June, it rose again to 5.4 percent in July. That led to a contribution to core inflation that rose to 3.2 percent from 3 percent in June.

Spread narrows

The spread between interest rates offered by banks on new loans and new deposits is an indicator that rarely earned much attention in the pre-pandemic world, where inflation was negligible and rates were low.

However, this spread broke out to record highs this year as banks responded to interest rate hikes from the European Central Bank by raising the rates on new loans, without similarly sized rises to rates on new deposits. As a result, we’ve paid quite a bit of attention to this indicator this year.

We’ve paid quite a lot of attention to this indicator this year, so it would be remiss not to note that the spread finally came down in June, to 5.51 percentage points from 5.76 percentage points in May.

This has more to do with a drop in lending rates — which had been soaring — than it does with deposit rates. The weighted average rate on new deposits increased to 0.31 percent from 0.28 percent — a 3 basis point increase, which was the same size increase as in May. On the lending side, the weighted average interest rate on new loans dropped 22 basis points to 5.82 percent.

While the rate on new deposits remains low, a couple of observations beneath the surface are worth drawing out.

The first point is that while interest rates on sight deposits by households — current (or checking) accounts — remained effectively glued to zero, the uptick in rates for term deposits is becoming more marked. The rate rose 20 basis points between June and April to reach 1.42 percent. Just in August 2022 that rate was at a record low of 0.11 percent.

The second observation is an anecdotal one, but when I checked the term deposit rates offered online by my bank today, they were in line with the figures on the Bank of Greece press release for the first time since I started keeping tabs on this earlier this year. While the rates available online were clearly higher than before, up until now they still lagged the rates in the official statisitics.

The explanation I was reading was that higher rates were available in branch. Nevertheless, it still feels like a shift that the latest rates I can see from my bank online — without having to set foot in a branch — are now in line with the published statistics.

Other data

• Greece’s seasonally-adjusted unemployment rate declined to 11.1 percent in June from a revised 11.3 percent the month before.

• Retail sales increased 7.2 percent from the same month a year earlier in May, compared with a rise of 1.7 percent in April.

  • Volume fell 0.4 percent in May from a year earlier, compared with a drop of 5 percent in April

• Industrial production decreased 3.6 percent from a year earlier in June, compared with an increase of 1.9 percent in May.

  • Manufacturing production decreased 0.6 percent in June; electricity supply fell 14.8 percent

• The central government posted a primary budget surplus of 3.56 billion euros in the first seven months of the year — higher than the target of 1.83 billion euros.

  • The government posted a primary deficit of 1.16 billion euros in the same period of 2022

• The manufacturing purchasing managers’ index in July was 53.5, up from 51.8 the month before, indicating the biggest expansion since May 2022.

  • A reading above 50 indicates improving operating conditions in the manufacturing sector, according to S&P Global, which produces the index

  • Expansion driven by stronger upturn in output and new orders

  • However, firms were less upbeat on concerns about potential interest rate hikes, inflation and the sustainability of strong demand

Next week’s key releases

Monday, Aug. 21:

• June balance of payments (Bank of Greece)

Friday, Aug. 25:

• Jan-July final central government budget execution (Finance Ministry)

This week saw the release of two of my favourite data sets — the sectoral non-financial accounts from the Hellenic Statistical Authority and financial accounts from the Bank of Greece.

These accounts are highly complementary in theory, since they both arrive at net borrowing/lending positions for each sector. Unfortunately, as we noted last week, there is a large statistical discrepancy between the two, which has the effect that I use the central bank’s data (also known as the flow-of-funds) much less that I would like.1

For example, the central bank’s financial accounts consistently estimate a better net lending/borrowing positions for Greek households than the statistical authority, Elstat, does. In fact, the flow-of-funds data suggests that they have tended to be net savers since the country’s adoption of the euro, whereas Elstat’s data shows that they have been net borrowers for all but a few quarters after the pandemic’s outbreak.

All of which is to say that the flow-of-funds data need to be treated with some caution. Nevertheless, it's a fascinating dataset since it shows what financial assets and liabilities each sector is accumulating against each other sector.

For instance, Greek households decreased their overall cash and deposit holdings in the first quarter by 3.01 billion euros.2

We’ve known for a while about the drop in deposits from the central bank’s monthly deposit data, which also show that there has been a rotation out of sight deposits and into time deposits. This is because interest rates have increased slightly on the latter, while they remain close to zero on the former.

At the same time, the flow-of-funds data shows that households’ search for yield also led them to increase their holdings of government treasury bills by 609 million euros, following a 198 million-euro increase in the fourth quarter of last year. Households also increased their holdings of foreign debt securities by 384 million euros.

The flow-of-funds data also show that the non-financial private sector as a whole got very close to achieving a positive financial net worth for the first time in almost a decade in the fourth quarter, but dipped slightly in the first quarter.

The Greek private sector’s financial assets increased in the first quarter — mostly as a result of higher valuations of unlisted shares and other equity. However, on the liability side, the value of the holdings of unlisted shares and other equity in Greece by overseas residents increased even more.

Wage gains

Turning now to Elstat’s non-financial sectoral accounts, one highlight was the strong growth in employee compensation in the first quarter, which increased by 7.2 percent from a year earlier, compared with 3 percent in the last quarter of 2022.

Taking transfers and other income into account as well, household disposable income grew 11.3 percent in the first quarter, compared with 11.7 percent in previous quarter.

We noted a few months ago that after adjusting for inflation, Greeks’ disposable income decreased in 2022. However, inflation is now on a downward trajectory — not withstanding the continuing growth in food prices — and disposable income growth has outstripped the growing cost of living for two straight quarters. Added to that, the growth in employee compensation also higher than headline inflation in the first quarter for the first time in a year.

On a final point from the sectoral accounts, the flip side of social transfers boosting disposable income as that there was a slight deterioration in the government’s fiscal balance in the first quarter compared with the same quarter of 2022 — with the main cause of this being an increase in social benefits.

With elections taking place in the middle of the year, the government spent quite liberally on social programs at the start of the year — and this will leave the government finances playing catch-up for the rest of the year.

Credit tightening

The growth rate of Greek bank lending to the private sector slowed to 2.8 percent in June from 3.1 percent the month before and from a recent peak of 6.3 percent at the end of 2022.

For non-financial corporations, the growth rate slowed to 5.8 percent from 6.7 percent in May and 11.8 percent in December. Consumer credit growth increased slightly, although overall lending to households shrank 2.7 percent, compared with a 2.8 percent contraction the month before.

Meanwhile, the Bank of Greece also released the bank lending survey for the second quarter, which showed an increase in demand for business, consumer and housing loans. The increase in demand for housing loans was especially pronounced.

We’ve talked quite a bit recently about the booming housing market, and this suggests people are getting more desperate to get on the ladder before prices go up even more. However, as we’ve also noted, mortgage lending has continued at a steady contractionary pace for more than a decade and has played little role in the current housing cycle.

As they invariably do, loan officers surveyed by the central bank report no easing or tightening in credit standards in any of the aforementioned categories.

Nevertheless, the counterpart to the increase in demand for mortgages has been an increase in the share of rejected applications.

Other data

• The number of visitors to Greece in the first five months of the year increased 32.9 percent from a year earlier to 5.76 million people.

  • Travel receipts increased 30.7 percent to 3.24 billion euros between January and May.

  • The average spend per visitor was 541 euros, down from 554 euros in the same period of 2022.

• Private sector deposits held at Greek banks increased 3.01 billion euros in June to 189.3 billion euros — the largest monthly increase so far this year.

  • Deposits held by households increased 941 million euros, while those held by non-financial corporations increased 2.43 billion euros.

• The economic sentiment indicator for Greece improved to 111.1 in July from 110.1 the month before.

  • It marks a further divergence from the average for the euro area, which deteriorated for a seventh straight month in July.

  • Greek consumer confidence also improved.

• Building activity, as measured by the number of permits issued, increased 0.9 percent in April from a year earlier.

  • The number of permits issued in the first four months of the year increased 10.1 percent from a year earlier.

• Greece’s producer price index decreased 11.7 percent in June from a year earlier, compared with a decline of 12.9 percent in May.

Next two weeks’ key releases

Monday, July 31:

• May retail sales (Elstat)

Tuesday, Aug. 1:

• June labour force survey (Elstat)

• July manufacturing purchasing managers’ index (S&P Global)

Tuesday, Aug. 8:

• July consumer price index (Elstat)

Thursday, Aug. 10:

• June industrial production (Elstat)

The deficit was 1.65 billion euros in the month, compared with a deficit of 2.08 billion euros in the same month of 2022, according to Bank of Greece figures released this week. For the first five months of this year, the deficit narrowed to 7.22 billion euros from 10.7 billion euros the year before.

A big part of what drove the narrowing of the gap was the oil balance, which was in a deficit of 2.19 billion euros in the first five months of the year — a third smaller than than it was in the same period of 2022. Meanwhile, early tourism returns also helped, as travel receipts increased 31 percent during this period to 3.24 billion euros.

The current account deficit was 9.7 percent of gross domestic product last year, and the Finance Ministry forecasts that it will only come down to about 5 percent by 2026.

Last week we didn't send out a regular weekly roundup, but we did instead do deep dive into the financial stability considerations around Greece’s housing market. In case you missed it, you can read it here:

Other data

• The central government ran a primary budget of 2.12 billion euros in the first half of the year, compared with a deficit of 3.43 billion euros in same period of 2022.

  • The target was for a primary deficit of 415 million euros

  • Net revenue amounted to 30.9 billion euros, compared with 26.3 billion euros in the first half of last year; target was 29.7 million euros

  • Expenditure was 33.3 billion euros, compared with 32.8 billion euros in 2022; target for first half of 2023 was was 33.9 billion euros

Next week’s key releases

Monday, July 24:

• First-quarter non-financial government accounts (Elstat)

Tuesday, July 25:

• First-quarter non-financial accounts of institutional sectors (Elstat)

• January-June central govt budget execution, final (Finance Ministry)

• Second-quarter bank lending survey (Bank of Greece)

Wednesday, July 26:

• June bank lending and deposits (Bank of Greece)

Friday, July 28:

• July economic sentiment (European Commission)

• April building activity (Elstat)

We looked recently at the increase in apartment prices, noting that they are getting close to where they were at their pre-crisis peak in 2008 — particularly in Athens.1 Then I brought up the b-word.

Here’s what I wrote:

But the other question is what implications this has for financial stability. The term “bubble” gets overused generally. When apartment prices started rising in Greece a few years ago, the term didn’t seem apt then. But when prices are now almost back to their pre-crisis levels — when they certainly were in a bubble — and that increase isn’t matched by a similar recovery in other metrics, then that at least begs the question of whether we’re in a bubble again.

It would be fair when reading that paragraph to infer that I’m suggesting that my answer to the question is: yes, real estate prices are getting bubbly again.

But I want to row that back a bit. A bubble is something that we identify in the rear view mirror, after it has burst. It seems that in every country you look, the rising price of homes is a contentious issue. If the market is about to crash, it’s more likely to be as part of a global phenomenon — and I see no good reason to consider Greece’s real estate sector as the canary in the coal mine for that. Housing is getting expensive for Greek residents, but that doesn’t mean it is going to get cheaper.

Sectoral balances

That paragraph from my original post seems a bit clumsy when I reread it, but the main question I wanted to raise is what, if any, implications Greece’s booming real estate market has for financial stability.

One lens through which to see a country’s economy is through its sectoral accounts. The net lending positions for a country’s private sector, public sector and the rest of the world must sum to zero, as a matter of accounting identity. It is often the case that when a country has a deficit with the rest of the world, and its private sector is also becoming more indebted, this pattern can lead to increasing financial fragility that can lead to a crisis further down the line. In Greece, we’re used to hearing about “twin deficits” — a current account and fiscal deficit. But what happens with the private sector also matters.

That’s the situation that Greece finds itself in at the moment. One of the most alarming charts I’ve made this year is of the country’s sectoral accounts, with the Finance Ministry’s projections through 2026. Under the government’s scenario, the external deficit will still be 5 percent of gross domestic product then — an amount corresponding to the private sector deficit, since the government budget is forecast to be in balance by then. All forecasts obviously need to be taken with a pinch of salt, but if that scenario were to actually happen, I’d be worried.2

In broad brushstrokes, this is a theme that has come up a few times in this newsletter, but what we haven’t ever done is map out this general schema to specific financial vulnerabilities in Greece.

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Depth unknown

So a better question than whether Greece’s real estate market is in a bubble would be: is there a channel through which apartment price growth could expose Greek financial vulnerabilities?

The first thing to note — which I did in my original post — is that Greece’s pre-crisis housing bubble was fuelled by mortgage credit. Today’s increase in house prices it’s happening despite a never-ending credit crunch in the sector.

Instead, it seems that much of the capital injection into Greece’s housing market is coming from overseas buyers. Foreign direct investment into the country’s real estate sector hit a record of 2 billion euros last year.

At this point, we run into a common frustration when covering the Greek economy, which is the paucity of available official data. The Bank of Greece gives us the apartment price index, but nothing on the volume of transactions, which would give us some sense of market depth.

This matters in particular because while real estate FDI total may have hit a record, the number is still small when compared with the net flow of housing loans in the years before the crisis. That peaked at 12.3 billion euros in 2007.

While there should be some kind of multiplier effect from FDI inflows, it’s hard to get any kind of sense from publicly available data of how much of a role Greek residents’ equity is playing in the market right now, or of how big the impact would be if the FDI flow dries up.

However, going back to our search for a transmission channel from the housing market to financial instability, we can say the following: the traditional story of loans extended during the boom part of the cycle turning sour and bringing down bank balance sheets during the bust doesn’t apply here. That won’t be the case because bank lending just hasn’t played a role in the current cycle.

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FDI inflows are also dwarfed by the size of the current account deficit, which came to 20.1 billion euros last year. When it comes to tracing the links between the growing indebtedness of Greece’s private sector and the country’s external deficit, non-residents snapping up Greek properties barely registers.

Who owes what to who?

Here we run into another problem with the data. The place to look for those linkages would be in the flow-of-funds accounts published by the Bank of Greece. Unfortunately, there’s a massive statistical discrepancy between the net positions of the sectors found in these accounts and those found in the national accounts produced by the Hellenic Statistical Authority.

For instance, in the flow-of-funds accounts, Greek households ran an overall surplus of 4.32 billion euros last year after increasing their deposits and reducing their debt. However, looking at data from the national accounts, the sector had a deficit of 11.2 billion euros. That’s a statistical discrepancy equivalent to 7.5 percent of GDP.

It’s a shame since the national accounts don’t give any indications of financial flows between sectors. If the two sources could be reconciled, the flow-of-funds dataset would be an extremely powerful tool.3

Using the same set of accounts, things get interesting when we look at what has happened to the stock of liabilities over the last few years. Although overall private-sector debt has been stable — and overall household debt has gently declined — the proportion of this held by the rest of the world has surged. It now accounts for about a third of total private sector and half of household liabilities.

This is entirely due to the banks’ securitisation programmes of the last few years, in which they sold portfolios of bad loans, removing them from their balance sheets. This programme has been heralded as a huge success in transforming the country’s lenders. Greek banks’ non-performing exposures — loans that are or more than 90 days in arrears or have recently been restructured — peaked at almost half of total loans in 2017. The percentage of NPEs to total loans is now back down to single digits as a result of the sales, and their restored health has made Greek bank shares one of the best performing investments in Europe this year.

Out of sight, out of mind?

One thing that this survey underlines is that while the crisis legacy of soured loans may appear to be a “solved” problem as far as Greece’s banks are concerned, these debt still exist and remain with us.

In terms of the rationale for the securitisation programmes, getting bad loans off the banks’ balance sheets was just supposed to be the first stage in the process. The idea was that the introduction of new investors into this market would help with the next stage, which is to restructure these loans and reintegrate distressed debtors into the financial system.

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Back in April I attended the Delphi Economic Forum, and one of the panels I listened to was about the secondary market for these loans. The discussion is well worth a listen for anyone who’s interested in the subject.

A clear theme of the discussion was that the results of this second step have so far disappointed. It’s also clear that the banks would actually like these loans cured and back on their books. In the words of one of the panelists: “banks have tons of liquidity and nobody to lend money to”.

Source of risk

We started this post with a comparison between the current housing market and Greece’s pre-crisis real estate bubble, and we end it with a look at non-performing loans, many of which are a legacy of that lending boom. Along the way, we’ve asked whether there is a channel through which current apartment price growth could expose financial vulnerabilities.

We haven’t answered that, but it’s a question worth thinking about. What follows is pure speculation, but it’s a sketch of what such a channel might look like:

• If Greece’s housing market is being propped up by foreign buyers, then prices are likely to drop if that foreign interest disappears.

• This will affect collateral valuations and depress the secondary market for non-performing real estate loans.

• Potentially, losses are confined to investment funds that bought the riskiest notes from the securitisation transactions.

• In an extreme scenario, losses are also borne on the senior notes, which returned to the banks with government guarantees.4 Since these are contingent liabilities of the state, this then adds to public debt.

There is a related scenario where, in the absence of protections for primary residences, this also leads to a foreclosure crisis. This is a risk that Greece’s political opposition tried to turn into an election issue, without gaining much traction. For their part, financiers involved in the sector say that a glut of home auctions would crash the value of residences and so be against their own interest. They insist they see foreclosure as a last resort, and as a needed tool to prevent strategic defaults.

Short of a social crisis, an alternate scenario is that the banks may get their wish of getting these loans back on their balance sheets, but they turn bad again in the next housing market downturn.

But it’s possible that the greatest risk here is just that the private debt overhang continues to weigh over Greeks, limiting access to financing and acting as a drag on economic growth.

Last week’s data

• Industrial production increased 1.4 percent in May from the same month a year earlier, compared with 4.1 percent in April.

  • Manufacturing increased 5.7 percent; electricity supply dropped 12.3 percent.

• Industrial import prices fell 20.8 percent in May from a year earlier, compared with a drop of 17.5 percent the month before.

  • Biggest price drop was in crude oil and natural gas, which fell 41.6 percent.

This week’s key releases

Monday, July 17:

• January-June preliminary central govt budget execution (Finance Ministry)

Friday, July 21:

• May balance of payments (Bank of Greece)

For many Greek households, this disinflation may not register, as prices are still rising rapidly in supermarkets. Food still prices rose 12.2 percent in June, an acceleration in the rate from 11.6 percent a month earlier.

Core inflation — which strips out both food and drink and energy — slowed to 4.9 percent last month from 6.7 percent in May.

The fact that headline inflation is now below 2 percent feels like it should be symbolic, since that is the European Central Bank’s inflation target. However, the measure that’s relevant to the central bank is the EU-harmonised index of consumer prices, which increased 2.8 percent in June — down from 4.1 percent the month before.

That’s quite a bit lower than the eurozone average of 5.5 percent. Last year’s energy shock in Greece was bigger than the rest of the euro area, pushing inflation higher. The flip side is that energy is responsible for the bigger drop now. Energy prices in Greece fell 22 percent in June, compared with a 5.6 percent fall for the euro area.

Higher and higher

The interest spread between new loans and deposits hit a record high in January, and each month since it has gone even higher.

Before January, the spread had never been higher than 5 percentage points. Now 6 percentage points is in sight after it rose another 16 basis points in May to reach 5.76 percentage points.

The average rate on new loans increased to 6.04 percent from 5.85 percent in April, while the average rate for new deposits remains way down at 0.28 percent, a rise of just 3 basis points from the month before.

Other data

• Greece’s manufacturing purchasing managers’ index increased slightly to 51.8 in June from 51.5 the month before, according to S&P Global.

  • A reading above 50 signals improving operating conditions.

  • While demand increased among both domestic and external customers, new export orders grew at a slower pace.

• The country’s trade deficit shrank by 11 percent in May compared with the same month in 2022.

  • Import fell 13.6 percent to 7 billion euros

  • Exports dropped 15.4 percent to 4.06 billion euros

Next week’s key releases

Monday, July 10:

• May industrial production (Elstat)

Friday, July 14:

• May import price index (Elstat)

This month was also the first time in five months that consumer confidence and overall economic sentiment — which also takes into account surveys of several business sectors — both increased.

I’m usually wary of reading too much into the sentiment indicators, partly due the difficulty in quantifying “animal spirits”. This applies even more so when it comes to comparing different country readings across the eurozone, however much they are supposed to be comparable.

Nevertheless, it's worth checking in on the indicator every once in a while to gauge how moods are shifting and how well the reading fits with the picture presented by more “hard” macroeconomic data.

And the reading does fit that picture, with Greece’s economic growth currently outperforming the euro area. With the exception of a few months at the start of the pandemic, when economic sentiment in Greece deteriorated less than the euro-area average, the gap is currently the biggest since 2008, before the country’s fiscal crisis.

Still, June’s economic sentiment reading of 110.1 is below the 113 recorded in February 2020, just before the pandemic started to have an impact on economic confidence. Only construction and services confidence is higher now than levels reached in the 14 months before the first lockdown.

Other data

• Greece’s unemployment rate dropped to 10.8 percent in May from a revised 11.3 percent the month before.

• Building activity in March, as measured by the number of permits issued, increased 34.2 percent from a year earlier.

  • Measured by surface area, building activity grew 68.9 percent, while by volume it increased 70.2 percent.

  • Permits issued in the first quarter increased 13.6 percent from a year earlier.

• Bank lending to the private sector grew an annual 3.1 percent in May, down from 3.9 percent the month before.

  • Net lending flows in the month contracted 275 million euros, the second month of declining net lending.

  • Lending growth to non-financial corporations slowed to 6.7 percent from 8.7 percent in April.

• Private sector deposits at Greek banks increased by 794 million euros to 186.4 billion euros in May.

• Retail sales increased 1.5 percent from a year earlier in April, following a drop of 0.3 percent in March.

  • Volume decreased 5.2 percent, after a drop of 8.7 percent the month before.

Next week’s key releases

Monday, July 3:

• June manufacturing PMI (S&P Global)

Wednesday, July 5:

• May interest rates on bank deposits and loans (Bank of Greece)

That’s the biggest increase in the data series, released by the Bank of Greece, and is the fourth straight quarter where the annual growth rate is at a record level. The surge is even higher in Athens and Thessaloniki, the country’s second city, where the increases were 16.5 percent and 16.1 percent respectively.

In the capital, apartment prices are now just 7.1 percent lower than they were at their peak in 2007.

While this is good news for home owners in Greece, the implications for the economy as a whole are far more ambivalent — starting with renters who are getting squeezed out of affordable housing, especially in the capital.

But the other question is what implications this has for financial stability. The term “bubble” gets overused generally. When apartment prices started rising in Greece a few years ago, the term didn’t seem apt then. But when prices are now almost back to their pre-crisis levels — when they certainly were in a bubble — and that increase isn’t matched by a similar recovery in other metrics, then that at least begs the question of whether we’re in a bubble again.

To put it in perspective, the disposable income of Greek households, unadjusted for price changes, fell 33 percent during the crisis from its peak, and still remains 20.7 percent lower than that peak.1 Apartment prices collapsed 42.4 percent during the crisis for the country as a whole, but have now recovered to within 14 percent of their pre-crisis peak. The swings are even more pronounced in Athens, where the peak-to-trough drop was 44.7 percent. Prices in the capital have surged 68 percent from their 2017 low.

Long-time readers will know that something we’re concerned about at Grecology is that a wide current account deficit along with growing private sector indebtedness — the situation Greece is currently in — is a pattern associated with rising financial fragility. A boom-and-bust housing cycle is one classic way in which this pattern often plays out.

One big difference between now and the pre-crisis housing bubble is that the increase then was fuelled by the mortgage lending boom of the early years of Greece’s euro membership. The picture is completely different now, with mortgage lending contracting continuously for almost a decade.

The two major factors that have commonly been linked with Greece’s current house price boom is the rise of short-stay tourist accommodation, like Airbnb, and foreign buyers taking advantage of the country’s Golden Visa scheme.

Foreign investment

Turning back to our sectoral balances theme, foreign direct investment arising from the Golden Visa scheme is part of the financing of Greece’s current account deficit — albeit a small one. FDI inflows reached a record high of 6.38 billion euros last year, and real estate investment amounted to almost a third of that.

The Bank of Greece also this week released balance of payments data for April, which showed that FDI inflows in the first four months of the year amounted to 1.13 billion euros, compared with 3.26 billion euros in the same period of 2022. This is in line with what we noted last month: that FDI inflows seem to be reverting to their trend.

We don’t have figures yet for this year showing what proportion of the inward investment was in the real estate sector. However, news reports suggest that apartment buying stemming from the Golden Visa scheme remains strong. In fact, Kathimerini noted this week that upcoming changes to the regulations that will make it harder to obtain a residence permit is a part of what drove prices in the first quarter, as investors are rush to buy before the opportunity ends.

Other data

• Greece’s current account deficit in April was 1.78 billion euros, compared with 1.66 billion euros in the same month of 2022

  • The deficit in the first four months of the year narrowed to 5.63 billion euros, from 8.64 billion euros in the same period of 2022

  • The goods and services deficit in April narrowed to 1.45 billion euros from 2.14 billion euros

  • April’s current account increase from a year earlier was due to a deterioration in the primary and secondary income balances

Next week’s key releases

Monday, June 26:

• Jan-May central government budget execution, final (Finance Ministry)

Wednesday, June 28:

• May bank lending and deposits (Bank of Greece)

• March building activity (Elstat)

Thursday, June 29:

• June economic sentiment indicator (European Commission)

Friday, June 30:

• May unemployment (Elstat)

• April retail sales (Elstat)

The seasonally-adjusted wage cost index fell 2.3 percent in the first quarter from the preceding quarter, while the increase from the year earlier slowed to 5.5 percent from 8.8 percent in the fourth quarter. That’s less than the 5.9 average inflation rate in the first quarter. On a non-seasonally adjusted basis, the year-on-year increase in the wage cost index was 6.2 percent.

Aside from the lockdown periods of 2020 and early 2021 — when the figures look like they were distorted by a lot of lower wage workers going on to job furlough schemes — strong nominal wage growth didn’t come until the second half of last year.

But in real terms the gains have been paltry — and they come right after a 8.6 percent drop in wages costs adjusted for inflation in the second quarter of 2022.

Situations vacant

Turning to job vacancies, there were 30,497 of these needing to be filled in the first quarter, which is the most since 2013. This could be seen as a sign of strong labour market, and it’s certainly the case that employment growth has been on an impressive trend for a number of years.

However, these figures still only translate to a vacancy rate of 1.4 percent, compared with a euro-area average of 3 percent. The vacancy rate is a measures of the ratio of job openings to the sum of openings and occupied jobs. As an indicator of how hard it is to fill positions, a higher rate can be seen as a sign of a tighter labour market.

Greece’s figures are the fourth-weakest in the euro area and comparable with those of Spain, which has the lowest rate. It has been far below the euro-area average for some time — and is still nowhere near Germany. This is even after the recent pickup in Greece and weakening in Germany, which slipped into recession this year.

This still-weak labour market — remember, for all that job growth is strong, unemployment remains in double digits — goes a long way to explaining why in Greece inflation has been almost entirely due to supply shocks, and why it is now decelerating more rapidly than the rest of the euro area.

Other data

• The central government’s primary budget surplus for the first five months of the year was 2.29 billion euros, compared with a deficit of 1.49 billion euros in the same period of 2022

  • The primary balance was 3.69 billion euros higher than the target for a deficit of 1.4 billion euros

  • Net revenue of 26.2 billion euros was 2.94 billion euros higher than its target

  • Expenditure of 27.4 billion euros was 383 million euros lower than target

• The import price index in industry dropped 17.5 percent in April from the same month a year earlier

Next week’s key releases

Tuesday, June 20:

• April balance of payments (Bank of Greece)

Last week we noted that inventories were likely to act as a drag on economic growth this year after a big build up in 2022.

An aspect of last year’s strong economic growth that hasn’t been remarked on much is the extent to which changes in inventories were an important driver — contributing 2.4 percentage points to the 5.9 percent increase in gross domestic product. That’s likely to prove a drag on growth this year as inventories adjust — unless the experience of the supply chain bottlenecks of 2021 and early 2022 caused a structural shift whereby firms want to hold more stock. The PMI report that managers want to run down stocks gives us an anecdotal hint that we’re not seeing a structural shift.

That’s exactly what happened in the first quarter, as every expenditure component of of GDP added to overall growth except for changes to inventories and fixed investment. Of these two components, inventories were by far the more important, subtracting 6.6 percentage points from the quarterly change in GDP.

Much of this was counterbalanced by a 5.5 percentage-point boost from the external balance — split equally between a rise in exports and a fall in imports.

The 0.1 percent contraction in the first quarter is exactly the same as the eurozone average. However, Greece is not technically in a recession like the euro area is — the onset of a recession is defined by two consecutive quarter-on-quarter contractions — since Greek GDP expanded a revised 1.1 percent in fourth quarter of 2022.

On an annual basis, Greece’s GDP expanded in 2.1 percent in the first quarter from the same quarter of 2022, down from 4.8 percent in the previous quarter. That’s still higher growth than in the euro area as a whole, where year-on-year growth was 1 percent in the first quarter.

As with Greece, changes in inventory was a major driver of the euro-area quarterly contraction. Unlike Greece, however, the rest of the currency bloc didn’t see the same inventory build up in the preceding quarters.

Paying back growth

In GDP accounting, inventories represent goods produced in a time period that don’t reach their final consumer in that same time period. So if a widget is produced in the fourth quarter, but is still sitting in a warehouse in on December 31, that will show up in GDP as an increase inventory. If it’s then purchased by its ultimate user when shops open on January 2, this will show as an increase in final consumption in the first-quarter accounts, but it will be offset by an equal decrease in inventories, so the net effect on GDP is zero.

In effect, GDP growth that’s driven by large increases in inventory is like “borrowing” from future GDP growth. This is what we are seeing in the first quarter data. In a sense, it means that the economy contracting in the first quarter isn’t as bad as it seems at first, but that interpretation holds only if we also acknowledge that last year’s growth rate wasn’t as impressive as it looked either.

Of course, there’s also another element to this, which is that large inventory build-ups can indicate that final demand is weaker than businesses had planned for. This in turn might be a leading indicator of a coming slowdown. When the business cycle turns, businesses draw down inventories and this amplifies the downturn. In general, inventories are seen as a volatile and pro-cyclical component of GDP, responsible for amplifying business cycles.

It could be that this is also what we’re seeing here. However, it’s worth remembering that we’re coming through a highly unusual economic period with the pandemic followed by supply-chain bottlenecks. It’s natural that firms will overcompensate, stockpiling goods and materials, as this process works itself out. Some caution is needed in trying to draw textbook conclusions from the patterns showing up here.

Interest margins keep spreading

The spread between the interest rates that banks charge on new loans and those they give for new deposits — which was already at a record highs for several months — widened another 10 basis points to 5.6 percentage points in April.

Last week, we noted that in the first four month of 2023 there was a notable rotation of people moving deposits out of overnight accounts and into term savings accounts, with longer maturities, to take advantage of rising interest rates.

The increase in average interest rate for deposit accounts with agreed maturities up to one year may be small compared with the increase in banks’ lending rates, but it rose to 1.22 percent in April from 1.16 percent the month before and 1.04 percent in February.

By contrast, the average interest rate on overnight deposit accounts actually decreased — from 0.03 percent to 0.02 percent.

Other data

• Inflation continued to decelerate in May as consumer prices rose 2.8 percent from a year earlier, compared with 3 percent in April

  • Prices for food and non-alcoholic beverages increased 11.6 percent from a year earlier

  • Greece’s EU-harmonised inflation rate fell to 4.1 percent from 4.5 percent the month before

• Industrial production increased 4.2 percent in April from a year earlier, up from 0.1 percent in March

  • Manufacturing increased 3.2 percent; electricity supply rose 9.9 percent

  • It’s the first time since July 2022 that overall industrial production rose more than manufacturing

• Greece’s trade deficit shrank 23.1 percent in April compared with the same month a year earlier as imports fell by more than exports

  • Imports fell 11.8 percent to 6.12 billion euros; exports dropped 4.3 percent to 3.95 billion euros

Next week’s key releases

Wednesday, June 14:

• April import price index in industry (Elstat)

Thursday, June 15:

• January-May preliminary central government budget execution (Finance Ministry)

• First-quarter labour force survey (Elstat)

Friday, June 16

• First-quarter wage cost index (Elstat)

Private-sector credit grew at an annual rate of 3.9 percent, down from 5.2 percent in March and 4.8 percent in February. In terms of net flows, there was a 789 million-euro reduction in net lending to the private sector in April, following a 1.22 billion-euro increase the month before.

Lending to business grew 8.7 percent in April, down from 10.7 percent the month before. For households, lending fell 2.7 percent compared with 2.5 percent in March.

The annual contraction in housing loans reached 4 percent, down from 3.7 percent the month before. Mortgage lending has been at depressed levels since the financial crisis, consistently contracting at a rate of at least 2 percent over a decade. So the latest data point doesn’t represent a sudden drop. Nevertheless, the contraction in April is the largest recorded in Bank of Greece data going back to 1981.

Consumer credit grew 1.7 percent in April, down from 2.1 percent in April. Despite the growth, in absolute numbers this category is small, with net borrowing in the 12 months through April increasing by just 156 million euros. To put that into context, household deposits in this period increased by 5.56 billion euros.

Deposit rotation

Private sector deposits in Greece fell by 15 million euros in April, after increasing 2.32 billion euros the month before. In the first four months of the year, private sector deposits fell by 3.66 billion euros.

Falling business deposits have been chiefly responsible for the overall private sector drop. For households, deposits increased by 1.13 billion euros in April, and by 246 million euros in the first four months of the year.

Aside from the overall flows, a distinct trend that is occurring this year is that Greek households are moving their deposits from overnight accounts to term deposit accounts, which are starting to offer higher interest rates.

Other data

• Greece’s unemployment rate crept up to 11.2 percent in April from a revised 11.1 percent in March

• Retail sales decreased 0.3 percent in March from a year earlier, while retail volume fell 8.7 percent

  • Sales fell 0.3 percent in the food sector; 13.7 percent for automotive fuel

  • Volume fell 11 percent in the food sector and 13.4 percent for supermarkets

  • Automotive fuel volume fell 6.9 percent

• Greece’s manufacturing purchasing managers index dropped to 51.5 in May from 52.4 in April, according to S&P Global

  • A reading above 50 signals improved operating conditions in the sector

  • The rate of new order growth “eased to only a marginal pace”, while the pace of expansion in employment also softened, according to S&P Global

  • “Although mentioning efforts to run down stock levels, firms continued to purchase inputs in response to greater production requirements.”

• Economic sentiment in Greece worsened slightly in May, according to the European Commission’s economic sentiment indicator

  • Consumer confidence improved to -34.5 from -44.6

  • Sentiment worsened in industry, retail and services

  • Overall ESI reading was 108.1 in May, down from 108.7 in April

Slowdown coming?

It’s worth taking a moment to briefly note that this week’s releases in the “other data” section are all pointing in the same direction — that the general slowdown in Europe has also starting to affect Greece’s economy.

Two aspects of the data stood out to me in particular. One was the large drop in retail volumes — particularly in the food sector, where inflation is still running in double digits. This indicates that the price elasticity of demand for food is maybe higher than we imagined, as consumers adjust to the rising cost of living.

The other thing that stood out was S&P Global’s passing reference in the PMI report to firms’ efforts to run down stock levels.

An aspect of last year’s strong economic growth that hasn’t been remarked on much is the extent to which changes in inventories were an important driver — contributing 2.4 percentage points to the 5.9 percent increase in gross domestic product. That’s likely to prove a drag on growth this year as inventories adjust — unless the experience of the supply chain bottlenecks of 2021 and early 2022 caused a structural shift whereby firms want to hold more stock. The PMI report that managers want to run down stocks gives us an anecdotal hint that we’re not seeing a structural shift.

Next week’s key releases

Tuesday, June 6:

• April interest rates on bank loans and deposits (Bank of Greece)

Wednesday, June 7:

• First-quarter gross domestic product (Elstat)

• April commercial transactions (Elstat)

Friday, June 9:

• May consumer price index (Elstat)

• April industrial production (Elstat)

The current account deficit shrank to 3.85 billion euros in the first quarter, compared with 6.98 billion euros in the first three months of 2022. Funds from the European Union’s Recovery and Resilience Facility, recorded under the secondary income account, significantly boosted the current account in both January and March.

Without the primary and secondary income accounts, the balance of goods and services improved by 66.5 million euros in March, compared with 1.76 billion euros for the first quarter as a whole. Moreover, the oil balance worsened in March from a year earlier, following improvements in each of the previous two months.

That was because oil exports fell 11.9 percent in March to 1.19 billion euros, while oil imports grew 8.6 percent to 1.9 billion euros. For the first quarter overall, oil exports grew 30.8 percent as oil imports grew 2.1 percent.

Mean reversion

One notable feature of the financial account of the balance of payments has been the upward trend in foreign direct investment into Greece, reaching a record 6.38 billion euros last year, most of which was from real estate transactions and mergers and acquisition activity. Much of it came early in 2022; 41 percent of the total — or 2.62 billion euros — took place in the first quarter.

So far this year, the amount of FDI has been far more in line with previous years. Inward FDI amounted to 910 million euros, just over a third of the previous year’s amount and also slightly lower than the 956 million euros that took place in the first quarter of 2021.

If it transpires that 2021 was the high-water mark for volume of FDI into Greece, there’s still scope for qualitative improvement if future FDI becomes more concentrated in greenfield investment.

Other data

• Building activity in Greece, as measured by the number of permits issued, fell 15.8 percent in February from the same month a year earlier.

  • Surface area dropped 14.2 percent; volume decreased 21.7 percent

• The central government posted a primary budget surplus of 2.44 billion euros in the first four months of 2023, compared with a target deficit of 869 million euros.

  • Net revenue of 21.1 billion euros was 2.51 billion euros higher than target

Post-election roundup

Prime Minister Kyriakos Mitsotakis’s landslide victory in Sunday’s election has been seen as a huge positive for markets, investment and the economy. Assuming there’s no major upset in the next election, scheduled for June 25, an upgrade to investment grade from one of the credit ratings agencies is likely to follow within weeks of that.

But some are sounding notes of caution.

Yannis Stournaras, who a few weeks ago was calling on political parties to rein in their spending promises, this week wrote an oped piece in Kathimerini talking about the need to make sure that Greece’s recovery isn’t derailed. In particular, he flagged concern about the size of the country’s current account deficit, and the need to use primary fiscal surpluses to build up special reserves that aren’t distributed in the form of handouts.

The European Commission also released recommendations for Greece this week, calling on it to contain expenditure and to address structural weaknesses in the economy.

Meanwhile, Theodore Pelagidis was today sworn in as finance minister in the interim government that will be in place for the next few weeks. Pelagidis, an academic economist and the deputy governor of the Bank of Greece, will be in place as the European Commission evaluates Greece’s request for RRF fund disbursements.

Next week’s key releases

Tuesday, May 30:

• April bank lending and deposits (Bank of Greece)

• May economic sentiment (European Commission)

Wednesday, May 31:

• March retail sales (Elstat)

Thursday, June 1:

• April unemployment (Elstat)

• May manufacturing PMI (S&P Global)

Here’s a summary of what data there was:

• The central government posted a primary budget surplus of 2.43 billion euros in the first for months of 2023, compared with a target deficit of 869 million euros.

  • Net revenue of 21 billion euros was 2.5 billion euros higher than target

• There were 123,070 more people starting jobs in March than leaving old jobs, according to the Labour Ministry’s employment balance release.

  

• The import price index in industry dropped 12.7 percent in March from the same month a year earlier.

• Industrial turnover increased 1.5 percent in March from a year earlier, compared with 6.8 percent in February.

  • The rate of increase had reached 54 percent in May of last year.

You probably saw the two posts that went out this week grading the government’s performance. But just in case you missed it, here’s Tuesday’s guest post from Dimitris Valatsas:

And here’s my response, which I sent out a little earlier this afternoon:

Next week’s key releases

Monday, May 22:

• March balance of payments (Bank of Greece)

Friday, May 26:

• February building activity survey (Elstat)

Earlier this week, we hosted a guest post by Dimitris Valatsas, who writes the Macro Letter, grading the government’s macroeconomic performance. I found Dimitris’s analysis excellent and eye-opening, but I didn’t agree with all of the marks awarded.

In justifying my own grading, I will follow the same framework that Dimitris sets out. In his words:

“I focus here on five distinct areas: gross domestic product, the labor market, real wages, investment, and inequality. I am deliberately avoiding any discussion of the deficit and the public debt load — in part because this issue receives ample attention as it is and in part because Greek debt dynamics are very peculiar. I am also avoiding any direct judgment on inflation (other than through real wages) given that exogenous inflation is beyond the government’s control, while endogenous inflation is primarily an issue for the European Central Bank.”

I completely agree with Dimitris that the government shouldn’t be judged on inflation. In fact, I always thought the political criticism on this issue was wide of the mark. The inflationary pressure Greece has faced is a prime example of a macroeconomic gust it can’t control.

In fact, I would extend this principle.

Economic winds beyond the government’s control have also filled its sails. Having learnt some lessons from the euro crisis, when the pandemic struck the euro area suspended fiscal rules that bound previous administrations. That in turn meant the government had permission to run a counter-cyclical fiscal policy, which has been a critical driver of Greece’s economic performance during this period.

This isn’t to say that I think the government is a helpless victim of circumstance and can’t receive any praise or criticism at all. The most obvious way governments in Greece can have a big impact on macroeconomic developments is by screwing things up. Low-key competent macroeconomic management is nothing to sniff at.

Rather, I think the bar for handing out “A’s” when it comes to the economy’s performance needs to be high. Especially if we choose not to judge the government over inflation hitting double digits. So I will go through the five areas Dimitris outlines and offer my own grades.

Before that, a caveat: Grecology is a newsletter that generally focusses quite narrowly on macroeconomic developments. There are more issues at stake on Sunday, including national security, human rights, migration, healthcare, education and many other things. Economics is what I write about, so that is what I focus on here, but this is not an overall judgment on the government.

GDP: much needed recovery momentum

Dimitris gives the government an “A” for the 5.7 percent cumulative increase in gross domestic product that took place between the second quarter of 2019 and the end of last year, a period when the euro-area average growth was 2.4 percent.

The arc of this period is output falling dramatically for all euro area countries in 2020 due to the pandemic, before rebounding sharply thereafter. Since all euro-area countries shared the same policy environment, Greece’s GDP performance relative to its peers can be seen as a proxy comparing its handling of economic conditions.

It’s great news that Greece’s economy is growing so much faster than the euro-area average rate, but it’s also what you would expect should happen. When Mitsotakis came to power, the country was just coming out of a “lost decade”, an economic depression that wiped out a quarter of its GDP. When the recovery began in earnest, it was always likely to be supercharged by rebound growth and abundant spare capacity.

The chart above compares output gaps — the difference between actual and potential GDP, as a proportion of potential GDP — for euro area countries at the end of 2018 and at the end of last year, as estimated by the European Commission. These figures need to be treated with extreme caution for reasons that we don’t need to expound on here.1 But for our purposes, they serve as an illustration of the different starting points between Greece and the rest of the euro area during our reference period.

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There’s also the underlying structural issue that sustained GDP growth is causing the current account deficit to grow alarmingly. Last year it widened to 8.2 percent of GDP from 4.5 percent the year before — a shift that was solely down to rising energy prices.

This is a deep cause of worry, and something that I’ll look at in more depth in a future post. For now, I’ll give the government a pass because Greece’s structural economic pathologies are things that will take several government and several terms to put right.

Nevertheless, I’m going to keep Dimitris’s “A” here because I’m not sure what more it would be reasonable to expect in terms of GDP growth. But in awarding the highest grade, we’re using up the government’s not-screwing-things-up credit. So it raises the bar elsewhere — especially when we grade employment and investment, since growth in both these areas is function of GDP growth.

Employment: More economic activity creates more jobs

Dimitris compares employment gains in Greece with the rest of the euro area. As with GDP, the starting points are very different though. Greece’s unemployment rate peaked at in 2013 at over 28 percent, and it was still at 17.6 percent in July 2019, the month the current government took power. That’s a lot of spare capacity in the economy, and it left a lot of low-hanging fruit in terms of new-job creation.

The chart above plots the annual change in GDP against the annual change in employment for years going back to 1996. Last year does stand out as a strong year, but taking the last four years as a whole, it seems broadly in line with what we would expect for new jobs given this level of GDP growth.

Since we’ve already rewarded the government with the top grade for GDP growth, I’m going to give the “B” for employment, instead of the “A” that Dimitris gives. I think there’s a case to make for reversing those grades, but not a strong enough case for awarding an “A” in each.

Real wage growth: really poor

Here’s some of what Dimitris has to say in the section on real wage growth:

“Real compensation of all employees has increased since the end of 2018 (I’m using the annual Eurostat dataset), by 1.75 percent. This is below the Eurozone average of 2 percent over the same period. However, this concerns total compensation — as we saw above, the number of Greeks employed has grown by about 9 percent over the same period. Assuming the data is directly comparable, this translates into a purchasing power loss of 7.25 percent per working Greek — a woeful performance.”

I don’t think there is much that I can add to Dimitris’s excellent analysis in this section. But I struggle to see a 7.25 percent loss of purchasing power per working Greek as being worthy of a “C”. This one is a “D” for me.

Investment: an encouraging start, but only a start

As Dimitris points out, investment was in a state of collapse when Mitsotakis’s New Democracy party took power in 2019. So while the growth in gross fixed capital formation since 2008 is impressive — 32 percent in real terms, 42 percent in nominal terms — these figures are so striking because the denominator is so low.

As an illustration of just how dreadful Greece’s levels of investment remain, gross fixed capital formation is still lower than consumption of fixed capital, or depreciation. So the stock of fixed capital has actually decreased under this administration.

Aside from the data contained in the national accounts, there are other encouraging signs. Foreign direct investment into Greece last year hit a record — although a large part of this is either real estate or M&A activity rather than greenfield investments — and there’s been positive news flow about new projects approved and signed with funds from the European Union’s Recovery and Resilience Facility.

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Those signs make me hopeful that if we’re doing this exercise again before elections in 2027, then I will be able to award the government of the day the top mark for investment. Now, since we’re grading what has happened in the last four years rather than what might happen in the next, I’m going to revise Dimitris’s “A” down to a “B”.

Inequality: stalling progress

As with real wage growth, I don’t have a lot to add to Dimitris’s analysis of the data in this area. Initially I struggled to reconcile that analysis with the “B” that he awards. The analysis shows that Greece made big progress in reducing inequality in the years before 2019, then that progress stalled. For me, that looked more like a “C” at best.

Policy choices were involved here. The previous government oversaw the improvement we see in Dimitris’s analysis while carrying out a fiscal consolidation of about 3.5 percent of GDP. It made choices concerning taxes, social security contributions and pensions that were criticised by both the International Monetary Fund, and by Mitsotakis when he was in opposition.

This often gets framed as a tradeoff between growth and inequality, or as a choice between policies that focus on cutting the pie more evenly versus policies that grow the pie. This is an analogy that’s Mitsotakis himself likes to make.

So how much has the pie grown under the current government?

We’ve already discussed GDP, but perhaps more relevant here is household disposable income. Taking a four month moving average of the quarterly data (to adjust for seasonal variation), this grew by 14.1 percent in nominal terms between the second quarter of 2019 and the last quarter of 2022. But most of those gains are eroded by inflation — adjusting for that, the increase becomes a much more modest 3 percent.

That said, this is one area where I’ve changed my mind in the course of writing this post and looking at the data, and I will keep Dimitris’s “B”. This is because I want to be consistent, and having stated that I don’t think the government should be judged on the high inflation we’re seeing, the corollary of that is that we shouldn’t be blame it for the rising cost of living reducing the purchasing power of disposable income.

Also, this disposable income would be even less if not for the transfers and subsidies that the government carried out to counter first the pandemic, then the rising cost of living. So although I come away wondering if I’m being too generous, but I will give the government the benefit of the doubt.

Summary: Cyclical upswing, risks ahead

Rereading Dimitris’s summary, there isn’t anything that I disagree with. Overall, I think the government’s handling of the economy has been reasonably good. If you aggregate the scores, Dimitris gives the government a grade point average of 3.4, which translates to a “B+”, while I will give them a GPA of 2.8, which is somewhere between a “B” and a “B-”. The difference between us isn’t great.

When the current government came to power in 2019, my feeling at the time was that the Greek economy was in a sweet spot of the business cycle where it was poised for several years of strong growth. Greece had exited its bailout programme the year before, no additional fiscal tightening was required and a change in government would kindle the “animal spirits” in business decisions that would catalyse a period of rapid recovery growth.

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We’ll never know how things would have panned out if the pandemic hadn’t intervened so soon after. However, most of those factors remained in place, or even became more favourable — notably, the government could use fiscal stimulus to get the economy going, while the RRF was added to the toolkit to focus investment. Against that, inflation reared its head, presenting other kinds of challenges.

On net, I think these forces have presented opportunities and helped the government achieve that period of rapid growth that seemed in the offing when it took office.

There is, however, one thing that we have only touched on briefly, and that is the external sector. Greece’s true Achilles heel is its reliance on forbearance from the rest of the world to finance its persistent current account deficits.

The Finance Ministry’s own projections show net borrowing from the rest of the world only coming down to 5 percent by 2026. The ministry projects that its government budget will be almost balanced that year, so the deficit with rest of the world corresponds to growing indebtedness of the private sector.

Exploring this aspect further requires its own post, and it goes beyond the framework we’ve set here. But typically, that’s a pattern that’s associated with growing financial fragility. It also highlights the dangers of handing out grades on the basis of on incomplete business cycles. Let’s hope investment and longer-term changes to Greece’s structural model resolves these imbalances.

For voters, politicians, and economists alike economic performance is always in focus during electoral campaigns. The current campaign leading up to the Greek election is no exception — so for my guest post I will examine the economic record of the Mitsotakis government, which came to power in July 2019.

Photo by Constantinos Kollias on Unsplash

Before we dive in, a few caveats: globally, the period 2019-2023 is highly unusual from a macroeconomic perspective, due to the impact of the pandemic, the reopening, and the inflationary wave that followed. To the extent possible, I will try to compare Greece’s economic performance with that of the Eurozone over the same period. I will use seasonally adjusted data throughout.

I focus here on five distinct areas: gross domestic product, the labor market, real wages, investment, and inequality. I am deliberately avoiding any discussion of the deficit and the public debt load — in part because this issue receives ample attention as it is and in part because Greek debt dynamics are very peculiar. I am also avoiding any direct judgment on inflation (other than through real wages) given that exogenous inflation is beyond the government’s control, while endogenous inflation is primarily an issue for the European Central Bank.

GDP: a growth powerhouse

Like that of other European countries, Greek GDP declined substantially in 2020 and rebounded strongly thereafter. But since the Greek government took office in July 2019, we can look at the entirety of the period and compare its performance with that of other Eurozone members, who faced the same pandemic and the same monetary policy environment throughout.

Between the second quarter of 2019 and the fourth quarter of 2022 (the last quarter for which we have data), the Greek economy grew by a cumulative 5.7 percent in real terms, significantly higher than the Eurozone average of 2.6 percent over the same period and also significantly higher than regional peer Italy. The only country larger than Greece that performed better over the period was the Netherlands, at 6.8 percent.

In terms of GDP growth, it seems clear to me that the government deserves an “A” for stellar performance throughout the crisis and its aftermath.

Source: Eurostat1

Employment: more jobs across the board

Beyond GDP, employment is a key economic variable for any government. For Greeks, as for other Europeans, the employment situation has improved significantly since COVID. In fact, unemployment has been on a downward trajectory (from extremely high levels) since the peak of the Eurozone crisis in 2013. But because the headline unemployment rate also includes labor force participation data, I prefer to look at the total level of people employed, as I do for the U.S.

Source: ELSTAT

As before, COVID introduces an anomaly in the data, so to address the government’s record it is best to focus at the start and end-point, and to compare the country’s performance with that of the Eurozone as a whole. Since Mitsotakis took office in July 2019, the number of people employed in Greece has grown by a cumulative 276,600, or 7.1 percent of the starting total.

In other words, the Greek economy has been creating jobs at monthly pace of 6,200 jobs. (in U.S. terms, this would be equivalent to the economy generating about 193,000 jobs per month). This is down from 6,800 jobs per month on average created during the last Syriza administration (September 2015 - June 2019).

But again, we are focused here on the performance in 2019-2023, so it is better to look at Greece’s economic peers. To make the data comparable with Eurozone aggregates, I looked at the period 2Q19-4Q22. During that time, employment in Greece grew by 6.5 percent, compared with 2.6 percent in the Eurozone. Once again, Greek economic performance compares favourably with that of the rest of the Eurozone — the jobs growth rate is at least one standard deviation above the mean.

On jobs, too, therefore, I feel compelled to give the government an “A.” The Greek labor market weathered the COVID storm much better than other Eurozone countries, and has resumed strong growth since.

Real wage growth: work that doesn’t pay

Source: Eurostat

One area in which Greece is lagging substantially is real wage growth. Total compensation of employees has been increasing since the mid-2010s, and continued to increase under the current government. But this is a nominal measure— adjusted for inflation, the picture deteriorated significantly in 2022.

Source: Eurostat, Author’s calculations

Despite all that, real compensation of all employees has increased since the end of 2018 (I’m using the annual Eurostat dataset), by 1.75 percent. This is below the Eurozone average of 2 percent over the same period. However, this concerns total compensation — as we saw above, the number of Greeks employed has grown by about 9 percent over the same period. Assuming the data is directly comparable, this translates into a purchasing power loss of 7.25 percent per working Greek — a woeful performance.

Source: Eurostat

Part of this is a chronic issue with the Greek economy. At 35.2 percent, compensation of employees as a percentage of total GDP is one of the lowest in the EU — excluding Ireland, only Romania is lower. This number stood at 36.7 percent when New Democracy took over in 2019 and has deteriorated since.

Though part of it is probably explained by the fact that Greece has very high rates of micro-enterprises (where entrepreneur income would not be fully captured by salaries), this is an area of the economy where the government inherited a laggard and made things worse. I would give the government a “C” for real wage growth.

Investment: still low, but climbing quickly

Another key consideration for the Greek economy is aggregate investment, which collapsed from an average of 23 percent of GDP during the 2000s to an all-time low of 9.6 percent in the third quarter of 2015 — the infamous quarter of Greece’s referendum. To this day, Greece has the lowest fixed capital formation as a percent of GDP of any EU member state, at 13.7 percent of GDP.

Clearly, raising investment remains a critical issue for any Greek administration. However, as above, I have focused on the change during the period of the current government. There, the numbers are impressive indeed: the Greek economy invested 42 percent more in 2022 than it did in 2018.2

Note that these are nominal numbers — adjusting for inflation would bring the number to about 32 percent.

Source: Eurostat

Once again, Greece clearly made a lot of progress over the past four years. At 42 percent, the growth in fixed capital formation is almost 1.5 standard deviations higher than the Euro area average of 24.4 period for the period 2018-2022. Moreover, this is significantly more impressive than the prior government’s performance: between 2014 and 2018, Greek fixed capital formation increased by 4.2 percent, a full standard deviation below the EU average of 22 percent over the same period.

Greece remains a laggard in EU investment, but given the impressive growth, the government deserves an “A” for investment.

Inequality: doing better, with room for improvement

Another critical area of focus for any government (and the voting public) is inequality. There are multiple measures of inequality and the EU data is relatively patchy, so I will rely on three commonly used ones to assess the government’s performance: the S80/S20 ratio, the gini coefficient, and the poverty ratio.

The S80/S20 ratio divides the income of the top quintile by that of the bottom quintile. Greece has seen a sustained improvement since 2013, when the ratio was 7.46, to 5.61 today. It has converged much more closely to the EU average, which has gone from 5.33 in 2013 to 5.16 in 2021, the last year for which data is available. But most of that improvement was under the previous administration — the ratio was 6.07 in 2018 and fell to 5.59 in 2019.

Another metric is the gini coefficient, which measures aggregate inequality. A lower gini coefficient shows lower inequality. The latest data point for Greece is 31.4 — somewhat better. Once again, most of the improvement seems to have taken place under the previous administration.

Finally, I look at the percentage of the population at risk of poverty, which Eurostat defines as the share of people with an equivalised disposable income (after social transfers) below 60 percent of the national median. Here, too, the government appears to have treaded water, with most of the progress having been achieved during the previous two administrations (2012-2019).

Overall, the government took office as Greek inequality was improving; it made neither substantial strides nor took steps backwards. I would grade its performance on inequality as a “B.”

Summary: a strong economic performance in aggregate, but living standards need more work

Overall, the 2019-2023 macroeconomic performance is commendable. Greece is at the forefront of Eurozone growth; the economy continues to generate a substantial number of jobs; and investment, Greece’s Achilles’ heel, is finally picking up steam.

However, the distributional aspects of the economy show that the median worker has seen most of the benefits of economic growth taken away by inflation. To be fair, the government has compensated households (rather than workers) by a substantial amount of direct subsidies — it remains too early to judge how these will play out, but they seem to have helped take the sting out of inflation.

Inequality is also an issue that plagued Greece during the height of the crisis, when the poorest households paid a disproportionately high price. There has been substantial improvement in this regard, and the proportion of Greeks at risk of poverty is now much closer to the Euro are aggregate — though more can be done to bring this ratio down further.

The people vs. the data

The data overall paint a fairly clear picture of strong economic growth — comfortably above Euro area performance for the relevant period in both absolute and relative terms. But how this translates to the voting public is a different issue altogether.

According to a recent survey, 51 percent of Greeks think the economy is faring worse than it was four years ago, versus 45 percent who think it is faring better. Some 56 percent think their own household is worse off than it was four years ago, compared with 40 percent who claim to be better off. Finally, only 40 percent judge that the government has done a good job on economic growth — an astonishing judgment given, as we saw above, Greece is performing very well both vis-a-vis its peers and compared to prior years.

This is a reminder that, regardless of what the data say, public opinion can be swayed significantly by recent movements — Nate Silver has done some excellent work on this in the U.S. context. And of course, the economy is only one of many issues voters think about when they head to the polls.

Consumer prices in April increased 3 percent from the same month last year, when the headline inflation rate reached its high of 12.1 percent, according to data out this week from the Hellenic Statistical Authority. Crucially, core inflation — the measure central bank policy makers pay closer attention to because it strips out volatile elements — came off its March high.

Core inflation, which excludes energy and food and drink, slowed in April to 6.1 percent from 6.7 percent the month before.

Food prices remained the fastest growing consumer price index component in April, increasing 11.4 percent from the same month a year earlier. While high, that was still a slower rate than March, when food inflation ran at 14.3 percent. The rate reached as high as 15.5 percent in December.

Other data

• Industrial production dipped 0.2 percent in March from the same month a year earlier, compared with an increase of 5.2 percent in February

  • This was down to a 28.1 percent drop in electricity supply

  • Manufacturing grew 7.8 percent from a year earlier

• Greece’s trade deficit shrank 19 percent in the first quarter to 7.22 billion euro from the same period a year earlier

  • Exports increased 17.8 percent; imports decreased 1.8 percent

  • In March, the trade balance increased 1.3 percent compared with the same month of 2022, rising to 2.58 billion euros

  • March exports increased 5.7 percent; imports increased 4.1 percent

Stournaras intervention

Greece’s political party leaders held a televised debate on Wednesday, and many of the headlines to come out of it have focussed on comments made about the wiretapping scandal.

But in terms of economic headlines around the elections, one of the most interesting developments was Bank of Greece governor Yannis Stournaras calling on all the parties to moderate their spending promises in an interview with the financial newspaper Imerisia.

We’ve talked several times in recent weeks about how inflation has given the government something of a fiscal windfall that it’s been able to use to fund pre-election giveaways. This seems to be getting a bit too much for Stournaras,

Stournaras has been making similar noises since last year. However, these are some of his most strongly-worded statements on the subject yet.

Asked how close Greece is to achieving investment grade:

Despite all the progress made so far, we still don’t have investment grade. That’s not very positive. It means we have to be very careful … I think that the ratings agencies are waiting on political developments. They’re waiting for the next government to judge whether to give us the investment grade, mostly on the policy programme of the next government.

After pointing out that the country most needed a stable government to emerge from the election, he continued:

Greece does not have the fiscal capacity to fulfill all these pre-election promises. Of course, I understand that before elections many people say things that definitely won’t be implemented, because if we properly cost what’s being said, they far exceed whatever fiscal space there is.

Next week’s key releases

Monday, May 15:

• January-May preliminary central govt budget execution (Finance Ministry)

• March import price index in industry (Elstat)

The seasonally-adjusted jobless rate dropped to 10.9 percent from a revised 11.3 percent in February, according to the Hellenic Statistical Authority. Although the rate was even closer to single digits in January, at 10.2 percent, unemployment remains on the steady downward trend that it has been on for the past decade. The youth unemployment rate in March was 24.2 percent.

As it’s a lagging indicator, the unemployment rate is one that we often don’t look at closely. But it’s worth periodically remembering that in July 2013, at the height of Greece’s depression, the rate peaked at an astonishing 28.1 percent — with the youth unemployment rate around double that. It’s been a long road back from that point.

Figures from the Labour Ministry, which publishes employment balance data comparing the numbers of people leaving jobs and with those starting new ones, confirm that March was a strong one. These showed a positive employment balance of 61,912, which is the most for the month of March since Greece joined the euro.

Digging deeper into the Labour Ministry figures, the sector with the largest employment balance was accommodation, with 24,150, followed by restaurants and catering with 5,630. Although it is still early in the year, this does hint at early expectations of another bumper tourist season in 2023.

Credit conditions

The Bank of Greece this week released data on lending and deposits in March, which showed some reversal of the tightening conditions that were apparent in the previous month’s release.

The annual growth rate in lending to the private sector ticked up to 5.1 percent from 4.8 percent in February. Lending flows were positive in the month, with 1.17 billion euros in net new lending following an increase of just 27 million euros in February and a drop of 2.02 billion euros in January.

On other side of the ledger, there was a 2.32 billion-euro increase in private sector deposits, following a cumulative drop of 5.97 billion euros in the first two months of the year.

But signs of conditions tightening are apparent in the Bank Lending Survey for the first quarter, in which loan officers reported a drop in demand for new borrowing for business loans as well as mortgages.

Speaking at the Delphi Economic Forum last week, Eurobank’s chief executive officer, Fokion Karavias, attributed the drop in demand to higher interest rates for new loans.

Fat margins

March was a month of banking turmoil outside Greece, but this didn’t amount to much increase in interest rates for depositors. The average weighted interest on new deposits crept up to 0.23 percent from 0.21 percent the month before.

For new loans, the weighted average interest rate increased to 5.73 percent from 5.57 percent. This mean that interest rate spread, which was already at record levels, rose another 14 basis points in March to 5.5 percent.

Other data

• Greece’s manufacturing Purchasing Managers’ Index dipped slightly to 52.4 in April from 52.8 in March

  • A reading above 50 signals improving operating conditions, so April’s data was still consistent with an expansion in the sector

  • Job creation was the fastest in a year, while new orders growth accelerated, according to S&P Global, which produces the report

Policy platforms

Greece’s election is now less than three weeks away, so we’re right in the thick of the campaign. However, the May 21 vote will almost certainly fail to produce a new government, so we’ll probably head back to the polls on July 2.

Although a lot can happen between now and then, the likeliest outcome from the second vote is that Kyriakos Mitsotakis returns to power at the head of a New Democracy-Pasok coalition government.

So, what has Mitsotakis committed to on the macroeconomic front for his second term? The prime minister unveiled his manifest last week. Here’s how Kathimerini reported these:

Mitsotakis reiterated “our non-negotiable goal is to increase wages by 25% within four years, so that the average wage reaches 1,500 euros,” while promising twice the EU growth rate, doubled public investment and a 70% increase in total investment, along with cutting the public debt to 140% of GDP in 2027 and 120% in 2030, and the restoration and maintenance of inflation at 2%.

He also promised investment in healthcare and education, continuing with the digitisation of the public sector so that 90 percent of the state’s services are on the gov.gr platform, and speeding up judicial processes.

For Syriza, the main opposition party, central planks of the economic platform include lowering VAT and reintroducing primary residence protection from foreclosure, as well as pledging to increase public sector wages.

However, the party is currently polling about 5 to 6 percentage points behind ND. If they finishes in second, getting a mandate to form a government would require not just collaboration with Pasok, but also the support, explicit or tacit, of Yanis Varoufakis’s party, MeRA25, and/or the Communist Party of Greece. It would probably require both those parties.

Getting all those parties under the same umbrella is, frankly, not going to happen. Given the size of the lead they’d need to overturn in order to come first, a return to power of Syzria and its leader, Alexis Tsipras, looks unlikely.

Next week’s key releases

Monday, May 8:

• March commercial transactions (Elstat)

Wednesday, May 10:

• April consumer price index (Elstat)

• March industrial production (Elstat)

In nominal terms, disposable income increased 7.4 percent, while the average rate of price increases was 9.6 percent, according to data from the Hellenic Statistical Authority. This led to the drop in inflation-adjusted, or real, disposable income.

In the fourth quarter, disposable income increased 10.9 percent from the same period a year earlier, the biggest nominal rate of increase since 2007. As inflation had started to slow by the fourth quarter, this translated to an increase in real disposable income of 2.6 percent, compared with a drop of 2.1 percent in the previous three months.

Household consumption grew by more than income for a sixth straight quarter, increasing 11.2 percent in nominal terms.

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Fiscal tailwinds

Meanwhile, on the government side, figures from the Hellenic Statistical Authority confirmed that the budget deficit last year shrank to 2.1 percent of gross domestic product, from 7.1 percent in 2021. The public debt to GDP ratio fell 23.3 percentage points to 171.3 percent.

The primary balance, which excludes interest payments, swung to a surplus of 0.1 percent of GDP from a deficit of 4.7 percent last year. This was partly due to the repatriation back to Greece of euro-area central bank profits on portfolio holdings of Greek government bonds.1

We talked last week about how the strong fiscal performance has continued into the first months of 2023, giving the government a boost in the upcoming elections:

I’ve been attending the Delphi Economic Forum this week, where Finance Minister Christos Staikouras boasted that the government was able to give the most away in subsidies to counter the increasing cost of living, while still achieving the largest fiscal adjustment in the European Union last year.

With elections now less than a month away, we’ll do a brief rundown of the main parties’ economic programmes in next week’s roundup.

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Other data

• Producer prices fell 10.9 percent in March from a year earlier, compared with an increase of 4.7 percent in February

  • Producer price inflation reached as high as 48.8 percent in April 2022

• Retail sales in February increased 11.3 percent from a year earlier, compared with a rise of 10.6 percent in January

  • Volume increased 2.4 percent in February, compared with a 1.2 percent increase the month before

• Building activity in January, as measured by the number of permits issued, increased 21.2 percent compared with the same month a year earlier

• Greek economic sentiment improved in April, according to the European Commission’s economic sentiment indicator, which increased to 108.8 from 107

  • However, consumer confidence deteriorated to -44.6 from -41.1

  • Confidence in industry, retail and services all improved; construction confidence deteriorated

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Next week’s key releases

Tuesday, May 2:

• March bank credit and deposits (Bank of Greece)

• April manufacturing PMI (S&P Global)

• First quarter bank lending survey (Bank of Greece)

Wednesday, May 3:

• March unemployment (Elstat)

Net revenue of 16.8 billion euros in the first quarter was 2.26 billion euros higher than the goal set in the 2023 budget, and compares with 12.1 billion euros in the same period of 2022. With expenditure 545 million euros lower than its target, the central government posted a primary budget surplus of 3.07 billion euros, compared with target of 28 million euros.

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The strong fiscal performance at the start of the year means things are continuing as they left off in 2022, when the combination of high inflation and good economic growth caused revenue to far outstrip its forecasts.

The government used last year’s windfall to finance a series of subsidies to households to counter the rising cost of living, keeping half an eye on upcoming elections. With the budget performance starting the year strongly for another year, even as the inflation rate starts to come down, fortune has dealt Prime Minister Kyriakos Mitsotakis a favourable economic hand as he seeks reelection on May 21 (and the likely follow-up election in July).

There will more to say on the fiscal picture next week, when the Hellenic Statistical Authority will report the general government's deficit and debt numbers for 2022.

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Other data

• Greece’s current account deficit in February was 1.32 billion euros, compared with 2.34 billion euros in the same month a year earlier.

  • In the first two months of the year, the deficit narrowed to 1.45 billion euros from 4.46 billion euros in the first two months of 2022

  • Exports of goods and services increased 19.3 percent in January and February; imports rose 2.9 percent

• Industrial turnover increased 6.7 percent in February from a year earlier, a steep drop from the 17.6 percent increase in January.

  • Increase was as high as 54 percent in May 2022

  • Rate now only 1.5 percentage points higher than February’s 5.2 percent growth in industrial production

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Next week’s key releases

Monday, April 24:

• 2022 fiscal data, first notification (Elstat)

• Fourth-quarter general government non-financial accounts (Elstat)

Tuesday, April 25:

• Fourth-quarter non-financial accounts of institutional sectors (Elstat)

• January-March final central govt budget execution (Finance Ministry)

Thursday, April 27:

• April economic sentiment indicator (European Commission)

• January building activity (Elstat)

Friday, April 28:

• February retail sales (Elstat)

• March producer price inflation (Elstat)

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