These past few years, after the sudden stop in market-derived external financing, Greece has been going through an extremely painful current account adjustment.
Since the current account can be expressed as the difference between national gross savings and gross capital formation, one way to view current account adjustments is through the interaction of these two figures.
As far as Greece is concerned, up until 2012, adjustment was borne solely through gross capital formation, which has plummeted. On the other hand, 2012, was the first year that savings made the largest contribution to the adjustment.
|source: Eurostat, own calculations|
A (-) sign in the chart above implies that changes in the two figures go towards narrowing the current account deficit, while a (+) sign towards widening it.
To put a bit more perspective of the damage done by the plummeting of fixed investment I would like to post one more chart where the consumption of fixed capital (i.e. depreciation) is added.
The past two years, consumption of fixed capital exceeded gross fixed capital formation, meaning that Greece’s net capital stock decreased. Something which in turn means that Greece’s potential GDP shrunk as well.
One of the few things that more or less all commentators agree, is that Greece’s tradable sector is miniscule and needs to grow in size. One of the greatest pathogenies present in Greek modern economic reality is the unbelievably distorted allocation of resources. Greece is the only EU country where, for the length of the time for which data are available, fixed investment in equipment not once exceeded investment in dwellings. In all other cases that this was the case, the countries concerned were said to be in a housing bubble (i.e. Spain, Ireland in the 00s). For Greece though this was everyday life.
In Q4 2012, for the first time since data run, investment in machinery and equipment exceeded that in dwellings as a % of total.
Viewed in the context of the prevailing situation, this occurrence though is hardly something to celebrate since it is more akin to a race to the bottom. Both categories of fixed investment are shrinking fast and the said fact is a matter of which one is decreasing at a slower pace.
For the first time since the depression kicked in though, investment in machinery and equipment increased in Q4 2012.
It now remains to be seen whether this is a one-off apparition or the start of the very much sought-after rebalancing. Fingers crossed that this is a case of the latter…