A look at economic sentiment in Greece

I have to admit that I’m not a big fan of economic climate/sentiment indicators. That does not mean that I also dismiss the importance of sentiment and its undisputable effects on economic activity.

We hear a lot about how sentiment regarding the Greek economy has (or rather had) improved these past few months. If I said that I was willing to take that with anything less than a grain of salt I would be lying. 

Here’s one chart though that I came up with after messing about with sentiment indicators and investment activity. (I calculated tri-monthly averages of the industrial confidence indicator so that I could somehow compare its trajectory with investment). The industrial confidence indicator is depicted in the right hand scale while investment in the left hand one.

source: Eurostat, DG ECFIN, own calculations

There is no denial that the big spike in machinery investment observed in Q4 2012 was made easier by the (low) base effect, nonetheless it was the first positive reading since 2008. The 1st quarter of 2013, investment was flat on a yearly basis and the 4-quarter moving average reached its higher level since late 2009. At the same time sentiment, in Q1 2013 stood at its highest level since late 2008.

source: Eurostat, own calculations

 

I know it doesn’t sound like much and it is nothing much but for a country in the state that Greece finds itself into, it is a start. I would very much like, or rather, I very much dread to find out where the relevant indicators will stand in June and July 2013. I’m afraid that renewed political uncertainty will take its toll on these fragile green shoots look-alikes and sentiment will take a dive again. If nothing else the said readings will be as good as an event study regarding the effect of political uncertainty on business sentiment. 

 

 

 

A look at energy prices for EU manufacturing under a Greek lens

The talk of the town in Greece lately is how high energy costs for the Greek manufacturing sector are prohibitively high. As the main cause of that the hike in the special consumption tax for natural gas is cited. Hereby I would like to look into what energy costs for manufacturing sectors of other EU countries are.

Eurostat provides data regarding the cost of natural gas and the cost of electricity. Data are divided into six consumption classes and out of those, in the charts to follow, I will include data for the second and fifth class (i.e. second lowest and second highest respectively).

First I would like to look at natural gas costs.

source: Eurostat, own calculations

Net of taxes, Greece has the 3^rd higher natural gas price among the EU countries for which data were available (the above refers to the 2^nd consumption class).

What I consider as being particularly interesting is what proportion of price taxes correspond to.

source: Eurostat, own calcualtions

Greece sits bang in the middle of the relevant table for the 2^nd consumption class which is particularly relevant for most SMEs. Let's bear in mind that SMEs account for the lion share of the Greek corporate universe.

Let us look at data for the 5^th consumption class now, which probably concerns more energy intensive firms and activities.

source: Eurostat, own calculations

Greece sits in the 4^th place of that particular table and if one cares to look at net prices, in the 2^nd place.

source: Eurostat, own calcualtions

What is remarkable is that for that particular consumption class, taxes account for a bit more than 10% of the gross price.

Now let us cast a furtive glance towards electricity prices.

source: Eurostat, own calculations

 

In the 2^nd consumption class, gross prices - wise, Greece is again sitting bang in the middle of the table.

source: Eurostat, own calculations

According to the chunk of the gross price that taxes account for, Greece is placed in the 1^st half of the table.

source: Eurostat, own calculations

Coming to the consumption class that energy intensive businesses fall into, electricity prices charged in Greece are the 5^th cheapest among the EU countries (for which data were available).

source: Eurostat, own calculations

In this case as well, taxes account for about 30% of gross price charged, placing Greece in the 1^st half of the relevant table.

To wrap this up, what the plethora of charts presented above tell us, is that as far as natural gas is concerned, taxes are not the reason that prices charged are that high. What they tell us instead is that net prices themselves are too high. Of course, the tax hikes didn’t help at all, especially in the current hellish juncture that Greece finds itself into. On the other hand, electricity prices, especially for energy intensive businesses, are on the low side, while taxes are higher compared to natural gas but again not outlandish when compared to our EU peers. What has to be taken into account is that the value added of Greek manufacturing is low and that even relatively lower or average energy prices can have a more adverse impact on manufacturers because of that fact.

Fixed Investment in Greece: a faint glimmer of hope...?

These past few years, after the sudden stop in market-derived external financing, Greece has been going through an extremely painful current account adjustment.

Since the current account can be expressed as the difference between national gross savings and gross capital formation, one way to view current account adjustments is through the interaction of these two figures.

As far as Greece is concerned, up until 2012, adjustment was borne solely through gross capital formation, which has plummeted. On the other hand, 2012, was the first year that savings made the largest contribution to the adjustment.

source: Eurostat, own calculations

A (-) sign in the chart above implies that changes in the two figures go towards narrowing the current account deficit, while a (+) sign towards widening it.

To put a bit more perspective of the damage done by the plummeting of fixed investment I would like to post one more chart where the consumption of fixed capital (i.e. depreciation) is added.

source: Eurostat

The past two years, consumption of fixed capital exceeded gross fixed capital formation, meaning that Greece’s net capital stock decreased. Something which in turn means that Greece’s potential GDP shrunk as well. 

One of the few things that more or less all commentators agree, is that Greece’s tradable sector is miniscule and needs to grow in size. One of the greatest pathogenies present in Greek modern economic reality is the unbelievably distorted allocation of resources. Greece is the only EU country where, for the length of the time for which data are available, fixed investment in equipment not once exceeded investment in dwellings. In all other cases that this was the case, the countries concerned were said to be in a housing bubble (i.e. Spain, Ireland in the 00s). For Greece though this was everyday life. 

In Q4 2012, for the first time since data run, investment in machinery and equipment exceeded that in dwellings as a % of total.

source: Eurostat

Viewed in the context of the prevailing situation, this occurrence though is hardly something to celebrate since it is more akin to a race to the bottom. Both categories of fixed investment are shrinking fast and the said fact is a matter of which one is decreasing at a slower pace.

For the first time since the depression kicked in though, investment in machinery and equipment increased in Q4 2012.

source: Eurostat

 

It now remains to be seen whether this is a one-off apparition or the start of the very much sought-after rebalancing. Fingers crossed that this is a case of the latter…