A midsummer macroeconomic update
Greek economic activity is holding up well as bank lending to businesses surges
It’s been a couple of months since our last Greek macroeconomic update, and the outlook is looking a little bit better than it was then.
For sure, inflation remains the dominant concern, with the rate of annual price increases continuing its upward surge to 12.1 percent in June. Against that, the early indicators are that the country’s tourist sector is heading for a record-breaking summer, providing some ballast for an economy that already performed a bit better in the first quarter than many expected.
The European Commission earlier this month increased its forecast for Greek economic growth this year to 4 percent, up from 3.5 percent in its spring forecasts At the same time, it revised down its forecast for the euro area as a whole to 2.6 percent from 2.7 percent.
Beyond the top macroeconomic headlines, here are a few more developments in the data that stand out for me:
After stalling in 2021, lending to businesses is surging. Bank of Greece data this week showed that the annual growth in bank credit to non-financial corporations reached 9.7 percent in June, the highest in 13 years, while it grew 4.5 percent for the private sector overall (both households and businesses).
Looking at the sectoral account data, provided by the Hellenic Statistical Authority, the private sector’s net savings went into deficit, on a rolling four-quarter basis, at the start of this year (see chart above).
The current account deficit is still looking bleak. The surge in commodity prices, energy especially, means a worsening of Greece’s terms of trade and is exposing structural problems in the country’s economy. The current account deficit of 10.1 billion euros in the first five months of the year is the widest since 2010. A bumper year for tourist receipts may make the historical comparison look slightly better as the year progresses, but the pandemic exposed just how brittle that income stream can be.
The government’s budget position has improved as the fiscal impact of the pandemic recedes into the rear-view mirror. This can be seen both in the Elstat’s sectoral accounts up to the first quarter, and the monthly budget execution bulletins, which show a primary fiscal deficit of 3.4 billion euros in the first half of the year — down from 9.1 billion euros in the first half of 2021 and less than a budget target of 4.9 billion euros. Tax revenue has come in particularly strongly, beating the budget target by 3.6 billion euros.
To sum up: we’re seeing the government deficit shrink, and as the public impetus is removed from macroeconomic activity, the recovering private sector is stepping up to fill in the gap. The external sector remains in deep deficit, but as long as the rest of the world is ok with that, the shift from the public to the private sector for propelling economic activity is happening against a backdrop of growth rather than recession.
The danger that lies latent in this dynamic is that increasing private sector borrowing increases financial fragility in the system and poses a stability problem in the future. After a decade of incredibly tight credit conditions in Greece, we hopefully have a bit of road before we get to that point. However, the situation cannot be sustained forever without some kind of structural improvements to its external position.
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