Growth returns but obstacles remain
PM heads to Thessaloniki with GDP on the rise but key deterrents to economic activity have not been tackled
ANALYSIS Growth, investment, a businessfriendly environment and even the social economy have been on Prime Minister Alexis Tsipras’s mind over the past few days. It is often the way that Greek premiers start to think about these kinds of things ahead of the Thessaloniki International Fair (TIF), where they set out their government’s economic vision and hear firsthand from the country’s businesspeople.
Tsipras is due to take part in TIF this weekend but one has to wonder whether his newfound interest in what drives and impedes the country’s economy has come far too late.
The gross domestic product data for the second quarter (Q2) of the year published on Friday by the Hellenic Statistical Authority (ELSTAT) means that Tsipras can at least go to Thessaloniki in the knowledge that despite everything that has happened in 2017 and previous years, a recovery is gradually emerging.
ELSTAT’s figures showed that seasonally adjusted GDP grew by 0.5 percent compared to the previous quarter, when there was also a rise of 0.5 percent. On an annual basis, the increase in Q2 GDP reached 0.8 percent. Increases in consumption and exports were the key drivers for the continuing expansion of the country’s economy.
Also, in other positive economic news on Friday, the Purchasing Managers’ Index (PMI) published by Markit showed significant improvement in the Greek manufacturing sector. The PMI reached 52.2 points in August, which is the highest that it has been for nine years.
The improvement came from an increase in new orders from both domestic and foreign clients, which for Greece in recent years has not been just to produce hopeful signs but to hoist itself onto an irreversible path toward a sustainable recovery. What is called for now, is not just for there to be fireworks, but for the light to be let in. led to firms hiring at the highest rate since January 2000. Purchasing activity also climbed to its highest level since 2009. Manufacturing firms expanded their output at the fastest rate for 40 months.
For a minute, it seemed that Greece’s numbers had been mixed up with another country’s – one that had not been under a program for seven years, had not seen a quarter of its economy disappear and had not paid the price for vacillation and political timidity.
However, even during these dark years for the Greek economy, there have been bright moments in the past. In 2014, for instance, growth made its first reappearance since 2008. Breakthroughs like this, though, have been short-lived. Political instability and a restrictive policy mix have repeatedly stamped out any budding recovery.
The challenge for Greece over the last few years has not been just to produce hopeful signs but to hoist itself onto an irreversible path toward a sustainable recovery. What is called for now, is not just for there to be fireworks, but for the light to be let in.
The two quarters of growth seen this year are not strong enough to make it certain that Greece will meet the target it has set in its 2017 budget, which is for the economy to grow by 1.8 percent of GDP by the end of the year. The second half of the year will have to beat expectations for this goal to be achieved.
While another record-breaking tourism season will undoubtedly help push the Greek economy along, there will be considerable pressure on local taxpayers as income tax, property levies and road tax are all due in the remainder of the year.
The other potential threat to the evolution of GDP figures over the second half of the year is, as always, the next program review that has to be carried out by Greece’s lenders. Direct talks will resume this month and the mission chiefs from the institutions are due back in Greece during the second half of October.
One of the reasons there are doubts over whether the 1.8 percent of GDP target will be met is that the first six months of this year were riddled with uncertainty about if and when the previous review would be completed. The next one, the third review, should not be as complicated but if it is dragged out as well, the rosier picture for the Greek economy will soon be blotted out by deteriorating sentiment, political battles and fresh doubt about the future.
The other element that has to be brought into the discussion about a sustainable recovery is the conditions for doing business in Greece. There are still significant barriers to investment, which range from the judicial system’s questionable ability to enforce contracts to the suffocating level of taxation for business based here or looking to set up operations in the country.
At 29 percent, the corporate tax rate is several points above the eurozone average, while the tax wedge for individuals stands at 40.2 percent, according to the Organization for Economic Cooperation and Development. This is four points above the average for the 35 OECD countries.
As far as justice is concerned, in Greece it takes an average of 3.5 years to resolve an insolvency, which is second only to Romania in the European Union. The average time for competition cases to be heard exceeds 1,000 days.
The other obstacle to growth is the public administration, through which so many things run. It has shrunk in terms of staff and spending since 2010 but numerous inefficiencies remain, such as licensing procedures and complex tax regulations.
In this respect, it was not a surprise to see the Greek prime minister, while out on his growth promotion offensive, unveil plans for improvements to the civil service. These include hiring new graduates to work in the public sector next year, ensuring that cash transactions between citizens and the public administration end by 2020 and digitizing the process for issuing business licenses.
The plan seems to contain proposals that are welcome but one has to wonder whether this has come too late to make a difference and whether, like the nascent recovery, it will turn out to be as convincing as Greece needs it to be.