The official Greek GDP figures for the first Quarter (Q1) of 2012, published yesterday (8th June), show a slight worsening since the first estimate three weeks ago. The economy shrank by 6.5%, rather than the previous estimate of 6.2%, compared with the same period of 2011. Compared to the peak Q1 of 2008, the fall is 17.44%. In fact, the Q1 figures for this year are by far the worst for any quarter since the current dataset commences seven years ago, in Q1 2005, and down 9.18% from then (at constant 2005 prices).
But one element of the GDP Q1 calculation leaps out of the pages of the press release from the Hellenic Statistical Authority. This is “compensation of employees”. This total is shown as €14.140 billion, and compares with a 2011 Q1 figure of €16.727 billion, and a Q1 2010 figure of €19.195 billion (all at current prices, i.e. not taking inflation into account).
This means that the “employee compensation” element of GDP (income method) has shrunk by 15.47% compared to the same period of 2011, and by an extraordinary 26.33% compared to the same period of 2010. This collapse in employee compensation largely reflects a reduction in the number of those employed – from 4,440,403 in March 2010, down to 3,843,905 in March 2012 – and the increase in the numbers of unemployed (annual figures for March from the Hellenic Statistical Office):
Other changes to note from the new Q1 GDP figures, compared to Q1 2011: exports up by 1.4%, imports down by 16.6%. Compared to Q1 in 2010, imports are down by a massive 24.76%.
At constant prices, general government expenditure has declined by 13.40% compared to Q1 2010, while household expenditure has gone down by 16.44% compared to 2 years ago. Compared to the same period of 2011, the decline in household spending is 8.54%.
“Since most businesses sell goods or services to each other, the decline in profits and the investment strike become self-reinforcing. Therefore, some other agent has to pick up the shortfall in investment if there is to be an economic recovery.”
No. It has to pick up the shortfall in *spending*. The obsession with direct spend investment is a complete red herring.
Money doesn’t stop at its first use. Simply providing people with money to spend is all that is required to get circulation. Profit then comes from whatever investment that induces in the system – bearing in mind that one person’s investment is another person’s wasted consumption.
You just need the currency issuer (which may or may not be government depending upon the political structure) to fund spending in a sensible countercyclical manner.
Businesses exist not to provide a specific good or service- a widget maker can become a tin can maker or an arms manufacturer can become a telecomms provider if they think it is more profitable. Businesses exist to make profits. It is the decline in profitability which causes the investment strike.
Since most businesses sell goods or services to each other, the decline in profits and the investment strike become self-reinforcing. Therefore, some other agent has to pick up the shortfall in investment if there is to be an economic recovery.
That agent can only be government.
“It is the investment strike which is causing the fall in wages, and the economic slump as a whole.”
Businesses only go on investment strike because they can’t see sufficient market for their products and services.
It’s the lack of sales orders that is causing the economic slump. Somebody has to do the spending.
Driving down the wage share of national income is of course the actual purpose of ‘austerity’ measures. It’s in order to drive up the profit share.
After businesses go on an investment strike the economy slumps, unemployment rises and the government deficit widens. If the government (willingly or otherwise) then cuts its own spending, the slump only deepens, unemployment rises further and the deficit widens even further.
But in Greece, as elsewhere, the entire process is set in motion by the investment strike. According to OECD data from 2007 to 2011 the Greek eonomy contracted by €7bn in nominal terms. Compensation of employees fell by €4.4bn. But investment (Gross Fixed Capital Formation) fell by €23bn. This is greater thn the entire fall in GDP (as other components rose) and is a significant multiple of the decline in employees compensation.
In real terms, if we apply the GVA price deflator to compensation of employees, they have fallen by €15bn over the period. This is from an economic contraction of over €27bn in total. But the decline in GFCF is €23.7bn, that is, the overwhelming bulk of the economic contraction (nearly 90% of the total).
It is the investment strike which is causing the fall in wages, and the economic slump as a whole.