Greece Is in Depression; Animal Spirit Is Negative

Greece looks in the doldrums even after subtracting deflation

General Economy As Greece Secures Bailout Deal

An elderly man walks through an empty street in central Thessaloniki, Greece.

Photographer: Konstantinos Tsakalidis/Bloomberg

How to measure the "animal spirit" of Greece?

By all accounts, the 11 million strong of the Hellenic Republic have endured their collective depression. But what could be considered a measure of how they are doing?

Many economists suggest nominal GDP.

Nominal, or current or top-line, GDP is a nation's economic output (real GDP) with present inflation added back in. Or it can be considered the actual current growth of the moment, and then schooled sophisticates subtract the nation's price increase or inflation. This short piece on the GDP deflator captures the complexity of math around a simple concept.

So, as an approximation, Nominal GDP = Real GDP + Inflation, or Nominal GDP - Inflation = Real GDP

But what if a nation has deflation and not inflation?

From grade school math, you have to worry about adding and subtracting a negative number:

So, as a rough approximation, Nominal GDP = Real GDP + (- Deflation), or Nominal GDP - (-Deflation) = Real GDP.

We, of course, have tattooed on our arm that a plus and a minus equals a minus, and that a -minus and a minus becomes a plus.  This is the math that we have done on Japan for years, and it works now in Greece.

The highlighted equation is the approximation that matters. This week, Greece "stunned" with good real growth. So, good real growth, take away horrific deflation, equals a nation's animal spirit.

It is not pretty.

An approximation of Greece Nominal GDP. This is a grim statement.
An approximation of Greece Nominal GDP. This is a grim statement.

The run-rate of Greece's real GDP is +1.4 percent. The deflator is -1.5 percent. A back-of-the-envelope sum of animal spirit is -0.1 percent.

This math does not include the recent carnage and may be modestly elevated by a surge of consumption in anticipation of Greece's national bank shutdown. The chart shows what was, and is, a protracted bout of negative nominal GDP. It is vital to note the depth of the decline in nominal spirit. Greece is not Japan. Greece is worse. I also show the 48-month moving average of spirit swooning from an optimistic 7 percent to a negative 3 percent.

This full 10 percentage-point swing in Greece's animal spirit is one definition of ... depression.


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