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The Globe and Mail

Euro zone looks for positive growth but Greece isn’t so lucky

Greece's Finance minister Yannis Stournaras arrives for a news conference in Athens November 28, 2012.

© Yorgos Karahalis / Reuters/REUTERS

The euro zone this week may report positive growth for the first time since late 2011, but some of its member states will not share in the good news if it does.

One is Greece, whose economy remains in the tank in spite of falling labour costs and booming tourism. On Monday, the Hellenic Statistical Authority reported that gross domestic product shrank 4.6 per cent in the second quarter, year on year. The data confirmed that Greece had recorded its 20th consecutive month of contraction, shrinking its economy by more than 20 per cent since the financial crisis began in 2008.

The good news, such as it is, is that the rate of contraction is somewhat less than expected – economists thought a downturn of about 5 per cent was likely. And the second quarter figure is unlikely to rattle Finance Minister Yannis Stournaras, who last week predicted the economy would return to growth in 2014 after a fall of about 4 per cent this year.

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He is probably right. Unit labour costs have fallen about 30 per cent since the start of the Greek debt crisis, an internal devaluation that has made Greece more competitive and boosted exports, even if it has not yet translated into a fall the jobless rate. Unemployment hit a record 27.6 per cent in May and almost 65 per cent of youths (aged 15 5o 24) are without work. But, typically, job growth lags economic recovery. In recent months, more Greek jobs have been created than lost.

A few brave economists predict a V-shaped recovery in Greece, though all bets are off if the country is forced to accept another savage austerity program in exchange for another bailout. On Sunday, a Bundesbank (German central bank) report leaked to Germany's Der Spiegel magazine said that European Union governments will "certainly agree to a new aid program for Greece" by early 2014. Since Greece's appetite for more austerity is nil, any new bailout negotiations are bound to be tense, all the more so since Germany has little interest in writing more cheques to keep the Mediterranean countries afloat in a sea of debt.

The Greek economy is too small to affect the performance figures of the euro zone and the wider EU. On Wednesday, the euro zone will report second quarter GDP figures. With overall confidence rising and manufacturing and exports on the rebound, there is a fair chance the GDP figure will nudge into positive territory for the first time in six quarters. Italy and Spain, the region's third and fourth largest economies, remain the wild cards. Italy is in especially dire shape; it launched its austerity program about two years too late and could drag down the whole region as it struggles to unclog its sclerotic, and highly indebted, economy.

Still, there is little doubt that the worst is over for the euro zone. If Wednesday's figures prove disappointing, the year-end figures probably will not. In a Monday note, Jason Schenker, chief economist of Prestige Economics, said "Europe appears to be turning a corner, and is likely to demonstrate positive growth in the second half of the year."

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