Untangling the year’s complex economic reality

There will be competition this year to find a punchy way to sum up this transitional, and potentially transformative, year for Greece. “Clean exit” is one of the terms that has been thrown about a lot recently, while even the “Grecovery” mantra of 2014 has been repeated in the past few months by those expecting to reap the benefits of Greece completing its third bailout this summer.

In fact, though, it will be impossible to sum up the significance or zeitgeist of 2018 in any phrase or amalgam of words because it promises to be a complex and sometimes contradictory year. Trying to encapsulate the next 12 months in a catchphrase promises to be much like trying to herd cats.

Much of the recent macroeconomic data sum suggests that the nascent recovery is building momentum. For instance, the monthly manufacturing Purchasing Managers Index (PMI) published last week by Markit showed that there was an improvement in this sector for the seventh month in a row in December. This is the best run for the Greek PMI since 2008, which was accompanied by the best figures for new orders and new export orders in almost a decade, with an equally positive impact on job creation.

This is not something that will provide comfort to the low-income pensioners who will see their monthly EKAS benefit slashed this year to just 35 euros or to the Aegean islanders who will pay more for their goods because of the abolition of their 30 percent value-added tax discount, but it is a sign of an economy whose deep wounds are slowly beginning to heal.

What makes Greece’s case so complicated, though, is that while there are signs the economy is turning a corner after many years of recession, it is also clear that there are serious challenges that have not been overcome yet.

Overdue tax obligations, for instance, stood at almost 100 billion euros at the end of October after rising at a rate of almost 1 billion euros per month last year. The stock of nonperforming exposures (NPEs) on Greek banks’ books also came close to 100 billion euros at the end of the third quarter last year, according to the most recent data published by the Bank of Greece.

Neither of these serious problems are going to be resolved between now and the end of the current adjustment program on August 18, even though the results of the stress tests to be carried out on Greek banks by the European Central Bank’s Single Supervisory Mechanism (SSM) will be known before then.

These are crisis legacies that Greece will have to tend to for many years and they will carry a disruptive threat until they have been pruned back to manageable levels.

Just to emphasize the confusing state of affairs, even a single collection of data can present a contrasting picture of which direction the country is heading in. A few days before Christmas, the latest statistics from the Labor Ministry’s Ergani hirings database were published: they showed that there had been an increase of 121,913 in the number of people employed in the private sector but that the average gross monthly wage had fallen from 1,060 euros to 1,025 euros, with just over a third of workers earning more than 1,000 euros per month.

There is no doubt that Greece stands on the cusp of a series of positive developments: The imminent conclusion of the third bailout review should lead to another sovereign bond issue, the start of a discussion about Greek debt relief among the country’s creditors, and a further uptick in the growth rate as confidence continues to return.

The feeling outside of Greece that the country has overcome the worst and is worth a look from an investment perspective was evident in the falling bond yields last week. The country’s 10-year yields fell to well below 4 percent on Friday, their lowest level in 12 years. Greek two-year borrowing costs stood at less than 1.5 percent, which was lower than the US Treasury equivalent.

Again, though, one must differentiate between what investors, who target relatively cheap assets that offer a higher potential reward than equivalents, are looking for and what will make a difference to people living and working in Greece.

Their interest in Greek bonds or shares in local companies may well help the economy in several ways, but is no substitute for long-term investment that can drive production, innovation and job creation.

In order for Greece to fully overcome the damage that has been done to its economy and society over the last decade, the country will need strong and sustainable growth that is able to boost employment, support higher consumption, bring in more public revenues and bolster the creaking social security system. This growth will only be achievable if the country attracts significant levels of investment.

It is worth remembering, though, that some analysts are skeptical about whether this step-change can be achieved. The International Monetary Fund, for instance, sees Greece’s average growth rate at around 1 percent of gross domestic product over the next four decades. The forecasts by the European institutions are more optimistic, but the IMF’s note of caution should be heeded in the months to come.

If we become obsessed with style rather than substance as Greece heads to the program’s finishing line, we will miss the bigger picture. There is patently no benefit in devoting energy to a discussion about whether Athens will make a clean exit, since continued tough fiscal targets and some form of monitoring mean it cannot be regarded as such, or if the recovery is being felt by everyone, as it will take years to put right what went wrong and, even then, it will probably come too late for many older Greeks.

Instead, the focus needs to turn to shaping the economy as it will gradually emerge from the confines of three European Union-International Monetary Fund programs that will have lasted more than eight years by this summer. Investment needs to be at the heart of this discussion.

The things that need to be done so Greece can compete on the international stage and attract capital, such as removing barriers to entrepreneurship and reshaping its tax system, do not lend themselves to buzzwords.