Macro roundup: Fiscal tightening
Next year is a moment of truth for the Greek economy as budget support is scaled back
The European Commission’s 12th enhanced surveillance report on Greece, released this week, has a useful chart breaking down changes in revenue and expenditure, which are forecast to reduce the primary budget deficit next year to 1.2 percent of GDP from 7.6 percent this year.
One thing this pandemic has shown is how effective fiscal policy is as a shield from economic shocks. Greece’s economy is currently looking, for now, to actually be in even better shape than it was before the lockdowns started last year. Government willingness to use its balance sheet to absorb the hit is a main reason why.
Now we’ve entered a new phase of the crisis as emergency measures are withdrawn and replaced by funding from the Recovery and Resilience Facility. The fiscal stimulus coming from RRF grants next year amounts to about 1 percent of gross domestic product, but these don’t weigh on the budget balance since they’re netted out by equivalent revenue, arriving from outside Greece.
However, the Commission’s chart neatly illustrates the extent to which higher RRF investment is dwarfed by the withdrawal of emergency expenditure measures, which are about four times larger.
So now we face a moment of truth, with a significant fiscal tightening coming up. This is where we’ll see how well the private sector can keep the economic momentum going with the training wheels removed.1
The Bank of Greece released data this week showing strong growth in residential property prices in the third quarter:
The central bank also released data today showing that lending to the private sector increased at an annual rate of 0.9 percent in October, up from 0.8 percent the month before. However, the net lending flow for the month was negative by 42 million euros, compared with a positive flow of 625 million euros in September.
Private sector deposits continued to grow in October. The increase of 11 million euros — compared with 441 million euros in September — was the lowest since the outbreak of the pandemic, except for January this year, when there was a seasonal drop. This was mostly due to a 563 million-euro drop in deposits from non-financial corporations. Household deposits increased 465 million euros in October.
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Next week’s key releases
Monday, Nov. 29:
November economic sentiment surveys (European Commission)
Tuesday, Nov. 30:
September retail sales (Elstat)
Wednesday, Dec. 1:
November manufacturing PMI (IHS Markit)
Elsewhere on the web
An interview with Patrick Wyman on history, empires, violent frontiers and Star Wars. This is quite far outside the range of what I’d normally include here but I enjoyed it so much I had to share. Listeners of Wyman’s brilliant Tides of History and Fall of Rome podcasts will recognise from those many of the themes applied here to a discussion of George Lucas’s saga.
Back to this newsletter’s core kind of material, here’s a breakdown of Greek manufacturing’s robust performance during the pandemic.
And a paper looking at the extent to which public loan guarantees in the euro area used for credit substitution.
Meanwhile, over in Turkey, the lira’s plunge is making it hard to buy iPhones.
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Or not. As I write this, the world is hit with news of a new covid variant potentially worse than any that came before. So maybe there will be more support. Best laid plans etc …