Greek Economy Survived Capital Controls, Initial Data Show

  • Economy shrinks less than expected in third quarter of 2015
  • Political debacle derailed Greece's nascent economic recovery

Greece’s economy shrank less than expected in the third quarter as the impact of capital controls introduced at the end of June was not as severe as analysts had forecast.

Gross domestic product contracted 0.5 percent compared with expansion of 0.4 percent in the second quarter, revised down from an earlier estimate of 0.9 percent growth, the Hellenic Statistical Authority in Athens said Friday. A Bloomberg survey of three economists forecast a contraction of 1 percent in the third quarter.

“Higher frequency data pertaining to the third quarter of this year signal some sort of normalization in domestic economic conditions following the initial shock inflicted by the late June events,” analysts at Eurobank Ergasias SA led by Platon Monokroussos wrote in a note. “All in all, a positive contribution from net exports and, probably, a less severe than expected decline in consumer expenditure appear to explain a significant part of the better than expected reading.”

GDP contracted by 0.4 percent in the third quarter from the previous year, on a seasonally adjusted basis, according to Elstat.

Tsipras Promise

Greek Prime Minister Alexis Tsipras was catapulted to power in January on a promise to end austerity, only to capitulate to creditors’ demands after the freezing of aid from the euro area brought Greece’s financial system to the brink of collapse.

Deposit outflows forced him to impose capital controls in June as the country fell into arrears on loan repayments due to the International Monetary Fund and negotiations about the terms attached to the country’s bailout lifeline broke up. Banks remained closed throughout July, following a referendum that pushed Greece to the verge of leaving the euro area, and only reopened with strict limits on withdrawals in place.

The controls were partly responsible for a 7 percent contraction in the domestic fuels market demand in the third quarter, Greece’s largest refiner Hellenic Petroleum said on Thursday. They also affected working capital financing in the period as open credit from crude oil suppliers was significantly reduced, the company said.

Small Firms

Revenue at small firms, which account for most of Greek business, fell by an average 48 percent in the first two weeks of the capital controls, according to a July survey of 1,005 companies by the Small Enterprises Institute of the Hellenic Confederation of Professionals, Craftsmen and Merchants, known by its Greek acronym Gsevee.

For a third of them, sales shrank by more than 70 percent as consumption contracted by 50 percent, or 3.8 billion euros ($4.1 billion), the survey found. Many enterprises were unprepared for the consequences of the controls and the three-week closure of banks, Gsevee said. A July parliamentary report estimated capital controls will cost the economy between 4 billion euros and 10 billion euros this year.

Other sectors of the economy, including industry, car sales, exports, and tourism, proved more resilient as the government managed to restore relations with creditors and sign a new bailout deal in August. Industrial production rose in August and September, while exports, excluding fuel, increased 5.6 percent in the third quarter from the same period last year.

“Basic sectors of the Greek industry continue showing significant increase in production, as they managed to turn their focus on external markets,” analysts at Alpha Bank AE led by Panayotis Kapopoulos wrote in their weekly report to clients on Friday. “Capital controls seem to have milder impact on the Greek economy than initially expected.”

Greece’s economy may shrink by less than 1 percent in 2015, probably by around 0.8 percent, Greek Economy Minister George Stathakis said Thursday. That estimate is much better than initial expectations for a contraction of around 3 percent and more recent estimates for a fall in economic output of around 1.5 percent, he said.

Eurobank also revised its estimates. “Given the surprisingly resilient GDP growth readings in the first three quarters of the year, and barring any significant revisions to past data in the following months, we now forecast full-year real GDP growth between -0.5% and 0.0%,” its analysts said, adding that the shallower contraction also implies “a significantly milder carryover into next year’s GDP than that forecast earlier.”

Related ticker:
1004Z GA (Hellenic Republic)

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