Investment baby steps
Greek gross fixed capital formation - the lowest in the euro area - is slowly creeping up
Greece’s third-quarter gross domestic product data this week confirmed that the good tourism season was a major driver behind the strong economic rebound. However, investment is also playing a supporting role.
Seasonally-adjusted gross domestic product grew 2.7 percent from the second quarter and 13.4 percent from the third quarter of 2020, according the Hellenic Statistical Authority. Services exports — the category that includes tourism — increased 85 percent year-on-year.
For all that Greece needs to diversify its economic model away from tourism, the sector remains critically important for the country. The country’s structural economic problems stem from that fact that domestic demand consistently outstrips its GDP, turning it into a net borrower from the rest of the world.
During the financial crisis, this was “remedied” by compressing domestic demand, bringing it closer into line with GDP. The collapse of tourism last year caused a spike in Greece’s domestic absorption ratio — the sum of final consumption and investment as a proportion of GDP — which came down again last quarter.
Greece’s high absorption ratio is most problematic because domestic demand is still mostly orientated around consumption. A central goal of economic policy in recent years has been to increase export orientation and and derisory levels of investment, but gross fixed capital formation has consistently hovered just above the 10 percent mark — the lowest in the euro area.
This is where an encouraging trend has started to emerge in the last few quarters, with investment playing an important supporting role in the GDP rebound. Gross fixed capital formation grew 3.9 percent in the third quarter from the second, when it increased 4.7 percent. In the first quarter it grew 5.9 percent.
That’s helped increase investment as a proportion of GDP to 13.4 percent, compared with 10.5 percent at the end of 2019. That still leaves Greece with the lowest rate in the euro area, but it’s a step in the right direction.
A major driver of investment growth in the last quarter was in dwellings — a manifestation of the residential construction boom Greece is currently undergoing. However, looking at the sum of the increase for the last four quarters, sources of growth are much more dispersed, with the biggest component coming from machinery and equipment.1
There’s still a long way to go before investment returns to the kind of levels that can result in a tangible reordering of Greece’s economic productive capacity. But the trend is moving in the right direction, and will also receive a boost from EU funds tied to the Recovery and Resilience Facility in the coming years.
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This category includes weapons systems, so if it’s the case that much of the growth there is coming from government spending on frigates and the like, then that’s not great for improving the productive capacity of the economy.