During the second quarter of this year, Greek GDP was down for the 20th consecutive quarter. Compared to Q2 2012, Q2 2013 figure was down only by -4.6% after -5.6% during the first three months. The pace is slower as it can be seen on the first chart but GDP is still down.
The most problematic issue is that, due to deflation, nominal GDP is decreasing more rapidly that real GDP. This has a very strong consequence on Public Debt to GDP ratio and on Public Deficit to GDP ratio. Even with huge efforts from Greek people on fiscal adjustment these indicators cannot improve as they should. And Greek people make effort and the adjustment is impressive.
From January to July 2013 primary budget (ex payments of public debt interests) balance was in surplus. It was at +EUR 2.6bn versus a deficit target of EUR -3.1bn. The overall budget balance was in deficit at EUR -1.9bn versus a target at EUR -7.5bn. This is just 1% of GDP versus -6.8% last year. In a deflationary economy this is a huge effort.
But we see here that there is a kind of crazy loop. As nominal GDP is down it will be complicated to stabilize public finances and the whole economy. Moreover as it is shown (here page 175) by O’Rourke and Taylor nominal wages are trending downward. This increases the length of the deflation period and cannot help to exit from deflation as this does not create pressures on prices.
The Euro Area has to intervene to stop this infernal loop (the IMF also could help – Remember last just its contrition on the Greek case see here). The rules have to be changed or find a way to reschedule the debt.
Chart 2 shows the real GDP level as % of its peak of 2008. it is down by 22.1% and is back to its 2001 level.
Chart 3 shows the real GDP per capita. It has dropped bu almost 24% since 2007 and is probably at its 1999 level. This was the year of the EA creation (Greece joined ion 2001).
The Greek situation is very complicated as GDP still contracts rapidly and Greek people have not the reward of their efforts. The Euro Area has a responsibility to stabilize nominal GDP in order to make this crisis over.
Greece is still a source of uncertainty, the Euro Area has to avoid that this becomes again a source of concern.
Chart 1 GDP – Annual Change
Chart 2 – GDP level as % of its 2008 peak
Chart 3 – GDP per capita as % of its 2007 peak
