Tuesday, 31 May 2011

Two charts about gross fixed capital formation in Greece,,.

After learning how to use twitpic I started posting some charts there, but I consider the following chart to be extremely important and to go some way into explaining the gross fixed capital formation shortfall witnessed in Greece.

source: AMECO

Loads of factors are cited as potent to explain capital productivity differentials, but I think that one of them outshines them all and is particularly fitting in Greece's case: the degree that the state interferes in the product markets along with the regulatory framework.

As I have repeatedly pledged fairness in what I write here, I have to say that there is a sector where relevant gross fixed capital formation helps Greece rank higher than some of its EU counterparts: investments in dwellings. 

source: AMECO

Notice that levels (as a %) of gross fixed capital formation in dwellings similar to that of Greece in the 70s and 80s were recorded in Ireland during the 00s when the country was in a property bubble. I know that Greece experienced an incredible wave of urbanization during the 70s and 80s but high CPI ( along with other factors) made sure that this was the only kind of investment boom that the country experienced back then...

Saturday, 28 May 2011

A quick look at Argentina after the default

I intended to write a post about Argentina for ages, but I never really got down to it. One aspect of the whole matter that I think is particularly interesting is the sectoral breakdown of activity before and after the country’s default, namely which sectors got the hardest hit after the default and which rose in importance. Argentina defaulted in early 2002.

source: United Nations

The chart above shows the main sectoral aggregations of economic activity as a % of Argentine’s GDP. The original figures are in USD terms so they might be affected by the peso’s fluctuations after the default and subsequent floating of the exchange rate (before the default the Peso was linked to the USD at a 1 for 1 parity).
A key takeaway from the chart is that activity in all non-tradable sectors (wholesale/retail trade, other activities, construction etc.) plummeted while tradable sectors rose in importance.
The “other activities” aggregate includes financial services, public administration, social and personal services, etc.
For Argentina the non-tradable sectors were overly large and the tradable sectors were “somewhat” smaller. Due to the inability to run current account deficits post-default, for the country to be able to resume imports of goods and services deemed as necessary or desired, the tradable sector had to export more, hence the aforementioned re-balancing (along with the shrinking of the domestic market which increased exporting’s prominence as a way out for businesses) .
Of course the current account deficits of Argentina were miniscule compared to the ones Greece has been running for decades now…

source: IMF

The shock in supply of goods in Argentina was said to be large due to disruptions in the importing business but imagine how large the shock for Greece will be given how large the country’s current account deficits are.
Furthermore, Greece’s need for re-balancing is much greater, since the tradable sector is ridiculously small and the non-tradable sector monstrously large.

source: United Nations

From where I’m sitting things doesn’t look good for Greece…

Monday, 23 May 2011

Household consumption trends and their implications for Greece

What must by now have become clear to everyone in Greece is that we’re in for a huge and really painful downward adjustment of disposable income. Its magnitude will in all probability be so large that what we’re currently witnessing will seem like a walk in the park.  Along with this there will of course be a sizeable decline in Greek people standard of living.

Greece’s distorted growth model was mostly based on construction, tourism and retail trade. Of course, this reality check that we’re living through right now is already altering and will further alter the Greek growth model whether we Greeks want to or not. 

In the medium/long term maybe one, if optimistic, can hope that some new growth model will emerge to make things better. 

Until then though it will be all about being able to survive and pull through the incomparably tougher times that are coming.

I had a look at the Household budgets survey of Eurostat. The most recent one dates back to 2005, but this doesn’t greatly affect what I had in mind. I wanted to see which segments of households’ consumption expenditures are more resilient when disposable income is lower.

Since there are data for all EU countries and the households’ disposable income in some of them are lower than those in others, by taking a look at panel data for all countries we can decide which segments of households’ consumption expenditure are more resilient.

source: Eurostat, AMECO

As it was probably anticipated, food and alcoholic beverage consumption expenditures are inelastic and when disposable income declines they just take up a larger % of it. This doesn’t mean that expenditures of this kind won’t decline when disposable income declines, they will decline but due to the nature of the needs they cover they will comprise a larger part of the new and lower total households’ consumption expenditures. So, I expect firms in this niche to prove more resilient.

source: Eurostat, AMECO

The next segment of expenditures that I’d like to take a peek at are housing and utilities along with heating expenditures. These expenditures are inelastic too but the scatter plot doesn’t capture this effect clearly. Of course, factors like the weather skew the results for some countries but, in my opinion, the presence of one particular component prevents the inelastic nature of the said expenditure to show on the scatter plot above, rents. The reason for this is that rents tend to go up along with disposable income. Of course, utilities companies will fare relatively well even in a depression setting.

source: Eurostat, AMECO

A sector that could more or less cope with a contingent consumption free-fall is that of communications. Of course, here, the situation could have changed a bit since 2005, due to changes in technology and internet (broadband) penetration increasing. It’s possible that prices of a lot of the communication products have decreased boosting demand further in the meantime. I think that the sector will do better than others but if a depressionary reality descends onto Greece then maybe this will prompt a few changes in the sector in the corporate level…but that is just some wild speculation…

source: Eurostat, AMECO

Next, let’s take a peek at a sector that the stereotypes floating around want Greeks to spend big on, recreation and culture. Well, I don’t know if the stereotype includes culture as well but it certainly includes recreation. The surprise though is that Greece is one of the laggards in expenditures of this kind according to the Household Budgets Survey. A few explanations spring to mind but I’m not going to mouth them or actually type them. Anyway, the said expenditures appear to have an analogous relationship with disposable income, so we are likely to see a lot of businesses of the kind to struggle If the next few (?) years are as harsh as I envisage them to be. This could shift some resources away from the non-tradables sector but a good question is where would they be shifted at.

source: Eurostat, AMECO

The last sector that I’m going to rumble on about is restaurants and hotels, again a sector a bit special for Greece, that lives up to its name this time. A heavy cultural and regional bias is present in this sector since all the countries with the said expenditure being above 80/1000 is Mediterranean (Greece, Portugal, Spain, Cyprus) with the sole exception being the UK. Greece is the dark blue dot in the scatter plot. Expenditures of the kind show a relatively analogous (but not very strong) relationship with disposable income but as I said a few line before, a cultural and regional bias is present. I expect the sector to be hit in a depression-like scenario but still to be above the EU average.

source: Eurostat, AMECO

To wrap this up, I have to say that these are just my personal views and that they’re pure guesswork. It is highly probable that Greek households’ consumption expenditure patterns will be altered but it really depends on a lot of other factors that I didn’t mention above. In any case, retail trade will be hard hit if my scenario materializes. Let’s wait and see what actually happens...