Economic Recovery in Greece, but Huge Political Uncertainty

CEIC Macro Watch Global #40 - January 29, 2015 Seasonally-adjusted real GDP reached EUR 46.9 billion in Greece during the third quarter of 2014, marking a 0.7% increase compared to the previous quarter and 1.6% on an annual basis. The positive trend in Greek GDP started in the second quarter of last year when the economy grew by 0.4% compared to the same quarter in 2013. This was the first time in 24 quarters a positive GDP growth rate was recorded. The main drivers have been tourism revenues and the recovery in private spending. However, the economic woes of the country are still present, shaken by the political and economic uncertainty stemming from the victory of the far-left party Syriza in the parliamentary elections held on January 25th, which is considered pivotal in the country’s post-1974 democratic history. The party opposes the austerity measures proposed by the Troika of lenders, thus bringing the country closer to an exit from the euro area – although Syriza is ruling out the option – and laying the ground for radical changes in economic policies, including a new debt restructuring programme to restore Greece back to health. Invariably the financial markets have reacted negatively, fearing the consequences. Greek government bond yields have been rising since October 2014 to reach an average of 8.42% pa in December 2014, and continued their upsurge in January this year above 9% pa for 10-year government bonds, contrasting with the falls to record lows in other Eurozone sovereign debt yields. Growing fears that the country might abandon the single currency (although still an extreme scenario), highlight the prospect of its total government debt default, so selling government securities is again on the agenda of investors. Greece is already in partial default and its huge debt stock will possibly see more write-offs, whether the “Grexit” transpires or not. The uncertainty has also seen the Athens Stock Exchange index (ASE) plummeting during the past few months. The free fall of the stock exchange index began in April last year and by end-December it had reached 826.18, decreasing by 14.2% on a monthly basis and 28.9% compared to the same month of the previous year. It subsequently fell further to 782.88 by January 21st, 2015, and despite the slight pickup a few days later, landing at 813.55 on January 26th, the day after the election, the prospects of stabilisation look grim, given the situation in Greece and in the wider Eurozone. Falling consumer prices in the Eurozone and the depreciating currency are also fostering bearish sentiment among investors. The euro depreciated to an average of 1.2359 against the US dollar in December 2014, a nine-year monthly average low. The single currency dropped by 0.9% compared to the previous month, and by 9.8% on an annual basis. The plunge continued into 2015, as the exchange rate dropped below USD 1.12/EUR by late-January. Due to the slump in oil prices, inflation in the euro area has been eradicated, delivering annual deflation of -0.16% in December 2014. By Petar Chavdarov in Bulgaria - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
29th January 2015 Economic Recovery in Greece, but Huge Political Uncertainty