Tsipras battling on all sides finds no solace in Greek economy

Alexis Tsipras has faced off against the International Monetary Fund, fellow euro-area leaders and even his own lawmakers in his battle to protect Greece. The economy is proving just as big a hurdle.

With one-quarter of the population without a job, prices falling and manufacturing shrinking, the Greek prime minister faces a mammoth task to revive growth. Data this week, including the latest unemployment statistics, will probably confirm the picture of an ailing economy mired in deflation.

Compounding the pressure, capital controls have restricted the functioning of the economy, which is set to be the only euro-area nation to shrink this year. The shutdown of banks came after Tsipras ended talks with creditors on a bailout to hold a referendum, then reversed course to enter a deal on funding.

“Greece will need to get used to the idea of a recession again,” Alessandro Bee, a strategist at Bank J Safra Sarasin, said by phone from Zurich. “Impending austerity measures will make the economic situation even worse” and “hopes of a rapid recovery are probably futile,” he said.

Greek gross domestic product has contracted more than 25 percent since 2007 as two bailouts with austerity conditions including salary cuts took their toll.

High Costs

Unemployment was close to 26 percent in April and a report Thursday will probably show little change on that. Markit will publish its factory index for July on Monday and the statistics office will release inflation data on Friday, precursors to second-quarter GDP the following week.

“The latest financial and political upheaval in Greece leaves the domestic economy in a state of flux,” Eurobank Ergasias SA economists Theodoros Stamatiou and Stylianos Gogos said in a note on July 30. “The present situation sows the seeds for another recessionary year.”

The economy has shrunk for two straight quarters and may contract as much as 4 percent this year, according to a July 29 report from the parliamentary budget office. While banks reopened on July 20 with limited services and the stock exchange is set to restart trading on Monday, the office estimates the controls cost the economy between 4 billion euros ($4.4 billion) and 10 billion euros. That compares with 2014 output of 179 billion euros.

Uncertain Future

Greece’s international creditors have been back in the country since last week and Finance Minister Euclid Tsakalotos met some of their representatives on Friday to discuss the austerity measures demanded in return for the next bailout. Tsakalotos highlighted the positive climate of the talks, a stark contrast to his predecessor, Yanis Varoufakis, who regularly clashed with his European counterparts and quit after tension escalated.

“Unemployment will remain at a high level because of the recession into which Tsipras and Varoufakis have pushed Greece with their reform reversals,” said Holger Schmieding, chief economist at Berenberg Bank in London. He forecasts that once a new deal is in place, “pro-growth reforms” will help lift confidence and “give way to a new upturn in late 2015.”

But even with a resumption of growth, the impact on the labor market may be limited. Economists in Bloomberg’s monthly survey in July forecast an average jobless rate of 26.3 percent this year and next.

For David Owen, an economist at Jefferies International Ltd. in London, interpreting all the moving parts is proving difficult: “we really do not know where we go from here,” he said in a July 30 report.

While there are positives — the next round of austerity won’t be as severe as previous cycles and the euro-area economy is recovering — the banking system remains in a state of disrepair.

That “must pose a severe problem for many households and companies,” Owens said. “And, anecdotally since the referendum, there are more stories of people and firms not paying taxes or starting to re-locate to other countries. Capital is certainly likely to leak overseas.”

[Bloomberg]