Greece: Recent Economic Developments and Selected Issues
Author: International Monetary Fund
Publication Date:
20 Nov 1996
eISBN:
9781451816068
Language:
English
Keywords:
ISCR; CR; Greece; exchange rate; GDP; drachma; inflation; unit labor cost; CPI inflation; inflation differential; durable goods; ULC index; Gross fixed investment; Labor costs; Europe
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This paper reviews macroeconomic developments in the Greek economy in 1995 and early 1996. During that period, the economic recovery gathered strength, driven by a strong pick-up in domestic investment. Although the recovery led to a moderate increase in employment, it did not prevent an increase in the unemployment rate. Inflation continued to decelerate gradually through 1995, but picked up somewhat in the early months of 1996 reflecting in part one-off exogenous factors. These macroeconomic developments, as well as key structural measures adopted in 1995 and early 1996, are described in detail in this paper.

Abstract

This paper reviews macroeconomic developments in the Greek economy in 1995 and early 1996. During that period, the economic recovery gathered strength, driven by a strong pick-up in domestic investment. Although the recovery led to a moderate increase in employment, it did not prevent an increase in the unemployment rate. Inflation continued to decelerate gradually through 1995, but picked up somewhat in the early months of 1996 reflecting in part one-off exogenous factors. These macroeconomic developments, as well as key structural measures adopted in 1995 and early 1996, are described in detail in this paper.

II. Real Sector and Price Developments

1. Aggregate demand and output

The overall macroeconomic scenario improved in 1995 as the economic recovery started in 1994 gathered strength, the investment rate picked up following four years of decline, and inflation continued to fall. As regards convergence with the EU, the record was less impressive: while the inflation differential narrowed further, growth continued to lag behind the EU average and unemployment rose while it declined in Europe (Chart 1).

Chart 1
Chart 1

Greece: Comparisons of Economic Performance

Citation: IMF Staff Country Reports 1996, 121; 10.5089/9781451816068.002.A002

Sources: WEO; and Bank of Greece.1/ Average annual percent change in consumer price index.2/ Ratio of gross fixed investment to GDP; data for Greece available only from 1988.

GDP growth accelerated from 1½ percent in 1994 to 2 percent in 1995 (Table 1). On the demand side growth in 1995 was led by a strong increase in investment, while consumption grew moderately and the external sector recorded a negative contribution (Chart 2). On the production side, growth was concentrated in construction and the manufacturing of capital goods.

Table 1.

Greece: Aggregate Demand

(At constant prices of the previous years)

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Sources: Ministry of National Economy; and Fund staff calculations.
Chart 2
Chart 2

Greece: Contributions to Growth

(In percent)

Citation: IMF Staff Country Reports 1996, 121; 10.5089/9781451816068.002.A002

Sources: Ministry of National Economy.

Growth in private consumption, at 1.6 percent, remained practically unchanged from the previous year reflecting the combined effect of negative growth in real disposable income and a decline in the private saving rate, with the latter possibly linked to the reduction in the real interest rate and an improved overall macroeconomic outlook. Government consumption increased by 1.4 percent, up from 1.1 percent in 1994, mainly on account of growth in employment and wages. Overall, a slight decline in the share of private consumption in GDP was offset by an increase in the share of government consumption, leaving the ratio of total consumption to GDP broadly unchanged (Table 2).

Table 2.

Greece: Aggregate Demand

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Sources: Ministry of National Economy.

Domestic investment was the fastest growing demand component in 1995. Investment in machinery and equipment was strong in both the private sector (12.1 percent) and public enterprises (7.7 percent). Construction, on the other hand, grew markedly in the public sector (7.3 percent), mainly on large-scale projects largely financed by Community Structural Funds, but remained flat in the private sector. A pick-up in construction permits and increased sales of cement suggest that the five-year long contraction in housing investment came to an end in late 1995. The contribution of the external sector turned negative in 1995 reflecting a relatively poor tourism season and buoyant imports of machinery and equipment, consistent with the investment-led pattern of growth in 1995.

Disposable income grew at a modest 7.5 percent in 1995, below the average inflation rate of 9.2 percent. This can be ascribed mainly to sluggish non-labor income and, to a lesser extent, to a fall in the real value of transfers received by the private sector (Table 3). However, it must be pointed out that these figures may understate the actual increase in disposable income because (i) part of the decline in non-labor income simply reflects the effect of lower inflation on interest payments on the domestic public debt, an important source of income of the non-government sector in Greece; and (ii) it is likely that, due to the surge in investment in machinery and equipment, firms may have recorded an unusually high level of depreciation, effectively reducing their profits in 1995.

Table 3.

Greece: Private Sector Income Account 1/

(In billions of drachmas; at current prices; percentage changes in parentheses)

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Sources: Ministry of National Economy.

Including public enterprises.

The developments described above led to important changes in the saving-investment balance: an improvement of 2.6 percentage points of GDP in government saving was absorbed by a decline in private saving of over 3 percentage points of GDP; as a result, despite moderate increases in the investment rate and a substantial increase in government saving the current account deficit widened by over 1 percentage point of GDP (Table 4).

Table 4.

Greece: Saving-Investment Balance

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Sources: Ministry of National Economy; and Fund staff calculations.

On a national accounts basis; government statistics refer to the general government.

Current account deficit.

Adjusted to include PIP transfers as current revenue.

Industrial production registered positive growth (2.1 percent) for the second consecutive year, following a four year period of contraction (Table 6). Growth was particularly strong in the production of capital goods, reflecting the strength of investment demand in 1995. In addition, a breakdown of manufacturing output by branch shows that growth was more broadly based in 1995 than in the previous year: only 6 out of 20 manufacturing branches registered negative growth in 1995, against 10 branches in 1994. Together, these results seem to support the view that the restructuring that took place in this sector in the early 1990s is finally bearing fruit, although a few sectors, most notably textiles and leather, continue to struggle.

Table 5.

Greece: Agricultural Production

(In thousands of tons)

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Sources: Ministry of National Economy; and National Statistical Service of Greece.

Oriental, burley, and Virginia varieties.

Table 6.

Greece: Manufacturing Production

(Percentage Changes)

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Sources: National Statistical Service of Greece, Monthly Statistical Bulletin; Ministry of National Economy; and IOBE.

Estimate by IOBE.

For 1996 growth will likely exceed 2½ percent, mainly on account of stronger private and public investment and a moderate acceleration in exports; there are also signs of an incipient pick up in domestic consumption. On the supply side, agricultural output is expected to recover while the expansion in industrial production and the services sector is expected to continue.

2. Inflation

CPI inflation continued to decline in 1995, with the year-on-year rate falling from 10.4 percent in December 1994 to 8.1 percent in December 1995; average inflation for the year was 9.3 percent, against 10.9 percent in 1994 (Table 7). A strong deceleration in food prices due to favorable weather conditions accounts for a important part of the fall in inflation; the reduction in inflation in the “housing,” “clothing and footwear,” and “durable goods” was smaller. Inflation in the services sector continued to exceed average CPI inflation, largely explaining the persistent wedge between consumer-price and wholesale-price inflation (Chart 3). 1/

Table 7.

Greece: Price Developments

(Average percentage changes over preceding period, except as indicated)

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Sources: Bank of Greece, Monthly Statistical Bulletin.

Weights are based on 1980 for the wholesale price index and 1988 for the consumer price index.

This category includes health and personal care and education and recreation, along with other goods and services.

Unit value of imports.

Chart 3
Chart 3

Greece: Wholesale and Consumer Prices

(Year-on-year percent changes)

Citation: IMF Staff Country Reports 1996, 121; 10.5089/9781451816068.002.A002

Sources: IMF, International Financial Statistics.

As in the previous year, the effect of cost factors on inflation was mixed in 1995: nominal increases in non-wage costs, net indirect taxes and import prices were all below the increase in the expenditure deflator (8.6 percent); unit labor costs, on the other hand, increased by over 11 percent (Tables 8 and 9). Growth in non-wage costs, in particular, was contained by a substantial decline in domestic interest rates and increased access to foreign currency-denominated loans.

Table 8.

Greece: Implicit Price Deflators

(Percentage changes)

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Sources: Ministry of National Economy.
Table 9.

Greece: Cost-Push Indicators of Inflation

(Percentage changes)

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Sources: Ministry of National Economy.

Per unit of output.

The gradual process of disinflation came to a halt in early 1996. CPI inflation accelerated gradually from 8.1 percent in December to 9.2 percent in April, falling slightly to 9.1 percent in May. Although exogenous and possibly temporary factors explain most of this increase, 2/ there is scant evidence suggesting that the fall in underlying inflation continued in the first quarter of 1996. However, a decline in inflation is likely in the second half of the year as increases in tradable prices are contained by the exchange rate policy.

3. Employment, wages and labor costs

The strengthening of the recovery led to a moderate increase in employment, but did not prevent an increase in the unemployment rate: in 1995 employment grew by 0.9 percent against a 1.3 percent increase in the labor force; as a result, the unemployment rate increased from 9.6 percent to 10 percent (Table 10). The number of registered unemployed people fell, leading to a marginal reduction in the average registered unemployment rate to 7.1 percent, from 7.2 percent in 1994.

Table 10.

Greece: Labor Force, Employment, and Unemployment

(In thousands, unless otherwise noted)

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Sources: National Statistical Service of Greece.

Period average.

Based on the annual labor force survey by the National Statistical Service of Greece.

By the Labor Force Employment Organization (OAED).

14+ age group.

The process of labor shedding observed in the manufacturing sector in recent years has apparently come to an end in 1995, with the number of people employed in this sector remaining practically unchanged from 1994 (Table 11). Although firms continue to rely quite heavily on overtime, there are some indications that the use of overtime may be tailing off and giving rise to employment gains. Employment in the construction sector continued to decline, while it increased in banking and the broad public sector.

Table 11.

Greece: Employment in Selected Sectors

(In thousands)

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Sources: Ministry of National Economy; National Statistical Service of Greece; and Union of Banks.

Seventy thousand persons employed in the repair of vehicles and home appliances have been reclassified into the service sector.

Permanent and temporary employees of the central administration, local authorities, and other budgetary organizations.

Earnings growth in the non-agricultural sector slowed down from 13 percent in 1994 to 11.8 percent in 1995 (Table 12). However, sectoral developments varied considerably: while average earnings growth decelerated from 12.9 to 11.2 percent in the business sector (non-agricultural activities excluding the public sector and banking), it accelerated from 9.4 to 13 percent in the civil service. Overall, earnings growth exceeded increases in minimum wages by a wider margin than in the previous two years, due in part to strong profits in 1994 and improved expectations of firms.

Table 12.

Greece: Wages and Salaries in the Nonagricultural Sector

(Percentage changes over previous period)

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Sources: Bank of Greece; and National Statistical Service of Greece.

National accounts basis (ESA).

Bank of Greece estimates; differences in rates of change between wage bill and average earnings are due not only to changes in employment, but also to statistical discrepancies.

Gross remuneration (including overtime) in establishments with ten or more employees.

Preliminary estimates.

All sectors excluding the civil service, public enterprises, and banking.

In the manufacturing sector salaries grew by 13 percent, the same pace as in 1994, while productivity increased by 2.3 percent. Since employment in the sector remained broadly unchanged in 1995, measured productivity gains came almost entirely from an increase in industrial production for the first time in several years. Unit labor costs increased by 10.6 percent in 1995, two percentage points faster than in 1994 (Table 13). In real terms, unit labor costs continued to increase in 1995, but remained below their level in 1990: The CPI-based real ULC index increased by 1.2 percent, but was still some 20 percent lower than in 1990; the WPI-based real ULC adjusted to also reflect changes in employer’s contributions to the social security increased by almost 3 percent and was only about 5 percent below its 1990 level (Chart 4).

Table 13.

Greece: Employment, Productivity, and Unit Labor Costs in Manufacturing

(Annual percentage changes)

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Sources: Bank of Greece; and National Statistical Service of Greece.

For wage earners.

Production per manhour.

Estimate.

Chart 4
Chart 4

Greece: Real Wages and Unit Labor Costs in Manufacturing

(1988=100)

Citation: IMF Staff Country Reports 1996, 121; 10.5089/9781451816068.002.A002

Sources: Bank of Greece; and National Statistical Service of Greece.1/ On the basis of CPI inflation.2/ Adjusted for changes in employers’ social security contributions. On the basis of wholesale price inflation.

A two-year contractual agreement covering 1996 and 1997 was signed in 1995, providing for an average increase of 7.8 percent in the minimum wage for 1996; 3/ on this basis, average wages are expected to grow by about 9 percent in 1996. 4/ The expectation of a small wage drift (in relation to 1995) is based on the fact that profits in 1995 had not been as buoyant as in 1994, and that unemployment has increased further. The existing framework for wage negotiations continued to promote stability in labor relations: the number of hours lost to strikes in 1995—in both the private sector and public enterprises—was the lowest in more than two decades (Table 14).

Table 14.

Greece: Collective Labor Agreements, Compulsory Arbitration, and Impact of Labor Disputes

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Sources: Bank of Greece; and Ministry of Labor.

Starting in 1992, arbitration decisions are not issued by courts, but by the newly-established (under Law 1876/90) Organization for Mediation and Arbitration.

4. Structural measures

A draft law containing measures aimed at tackling unemployment is expected to be presented before Parliament by mid-1996. The draft law, which was based on a report prepared by a committee of experts from the Labor Force Employment Organization (OAED) and various ministries, contemplates the introduction of a multiple-use voucher system that would allow the unemployed to opt for income support, training or a subsidy for a firm willing to employ him. 5/

While the short-run impact of the new law on employment is expected to be modest, its budgetary effect may be sizeable as it is likely to discourage underground economic activities and close loopholes that, at present, allow unemployed workers to receive redundant benefits. In addition, the new system also envisages bringing illegal immigrants into the formal economy by giving those without a criminal record a 6-month work permit which, upon expiration and (provided they meet certain criteria), would make them eligible for a 1-3 year extension. Penalties for those employing illegal aliens would be stiffened and enforcement would be facilitated by the existence of work permits.

Privatization activities during 1995 included the sale of the country’s second largest mining complex, Cassandra Mines to Canada’s TVX Gold in what represents the second largest privatization in the history of Greece. In addition, five companies from the state-owned Industrial Reconstruction Organization’s (IRO) portfolio were sold; as a result, the IRO’s portfolio now includes only ten companies which are expected to be either sold or liquidated by the end of 1997. In April 1996, the government sold 8 percent of the National Telecommunications Company (OTE) in the Athens stock exchange raising approximately US$600 million.

After failing to attract important bids in a competitive tender for a minority stake in the Skaramangas shipyard, 49 percent of the stock was sold to the workers of the firm. As part of the deal workers accepted a proposal that included the firing of one-third of the shipyard’s employees, a 3-year wage freeze, and unpaid overtime. The rest of Skaramangas’s stock remains in the hands of state-owned bank ETVA which is currently negotiating management of the company with various firms.

As regards privatization plans for 1996, the government is contemplating the flotation of a small part of the National Petroleum Company’s (DEP) stock. There are also plans to sell Bank of Crete. Finally, a recently approved legal framework for the management of state companies will guarantee, inter alia, free competition for procurement.

1/

Relatively high inflation in this category (not captured by the wholesale price index) is partly due to an average increase of near 10 percent in administered prices of goods and services provided by public enterprises.

2/

These include indirect tax increases (on diesel fuel, gasoline, cigarettes, beer and car registration fees), an increase in the international price of oil and the impact of bad weather on food prices.

3/

The agreement covers the non-bank private sector and contemplates an increase of 3½ percent in January and 4 percent in July. In addition, a corrective 0.1 percent increase was awarded on January 1. For 1997, the agreement provides for a minimum wage increase equal to the government’s end-year inflation objective plus 2 percent divided by two (to be awarded in January and July), plus a corrective amount equal to the excess of actual end-year inflation in 1996 over 6.5 percent.

4/

Contractual agreements leading to an average increase of 9 percent in minimum wages were also reached for banks and public enterprises.

5/

Firms would face restrictions on layoffs of individuals employed through this program.

Same Series

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Cover IMF Staff Country Reports
Greece: Recent Economic Developments and Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 1996: Issue 121
Publisher:
International Monetary Fund
ISBN:
9781451816068
ISSN:
1934-7685
Pages:
221
DOI:
https://doi.org/10.5089/9781451816068.002