Tuesday, 21 January 2014

Why Greek manufacturing cannot catch a break.

If one is miserable enough to be tracking the trajectory of Greek manufacturing production she/he may have noticed that after a headfake in late 2012 – early 2013, when the 6-month moving average of the manufacturing production index slipped into positive territory, it dipped right into the abyss again.

If someone adds the respective indices for Spain, Portugal and EU28 into the mix one thing that becomes eerily obvious is that at the same time that all others rebound, we plunge.

source: Eurostat, own calculations

An easy conclusion out of that would be that Greek manufacturers, despite the collapse in domestic demand, remain desperately inward-oriented. Some others would claim that the lack of financing or high energy cost (both prevalent stories in Greek mainstream media) is to blame. Usually though truth lies somewhere in the middle. But we’ll come back to that later.

If one takes into consideration the fact that aggregate indices can conceal huge divergences among their components, a good question would be if the spike of the manufacturing production index observed earlier this year was even an actual spike or if it was driven by a few index-heavy sectors while the underlying conditions was still dire. If that was the case then the fact that production plunged again should be no surprise.

I think that a relatively straightforward way to gauge this is to find out how many sectors where in expansion each month (disregarding for now the different weight that different sectors may have). The total number of sectors in this classification is 15. I think that comparing the situation in Greece with that of Spain and Portugal would help us to draw some conclusions but since data for Portugal were spotty, we have to do with just Spain (re Spain, the last couple of months, namely Oct and Nov a couple of sectors lacked data but that doesn’t alter the conclusion-reaching here). Here is the chart.

source: Eurostat, own calculations

Manufacturing in Spain was in expansion on September and November of 2013, while in Greece in August, October and December of 2012, as well as March, April and June of 2013. Common sense has it that during the first few months of expansion the sector will be dragging its feet out of recession with fewer sub-sectors on the rise while the expansion will pick up pace as and if the rise in production persists. True to that, in Greece, more sectors were in expansion in 2013 than 2012 but they were still far fewer than those in the very first months of the rebound in Spain. Meaning, in my book, that Greek manufacturing cannot be said that it was in expansion these months but that it was merely trying to form a base and stabilize (and not with particular success as it appears).

I think it’s time to come back to the question I posed earlier in the post. Why can’t Greek manufacturing catch a break?

One reason cited often enough is the lack of financing. The DG ECFIN survey about Industry offers some insight on that.

source: DG ECFIN

The % of respondents citing financial problems as the main reason limiting production is rising fast in Greece, at the same time when it appears to be dropping in Spain and Portugal. So that argument holds some water.

At the same time the % of respondents choosing another answer to the very same question is rather interesting.

source: Eurostat, own calculations

source: DG ECFIN

The Spanish and Greek manufacturing sectors have suffered an almost equal collapse when compared to the 2008 level but the % of Greek firms participating in the survey who claim that they are happy with the present situation is considerably higher than the respective figure for Spain.  Could this mean that a sizeable chunk of Greek manufacturers are still happy with just shooting for the internal market?

Another problem often cited in Greek media are high natural gas prices and especially for firms in the highest consumption bracket.

Natural gas prices for top-bracket consumers in Greece are indeed among the highest in the EU28. So we can chalk up one more obstacle in the Greek manufacturers’ quest for survival.

source: Eurostat, own calculations

The reason that this is the case though is not the tax burden as it is widely believed but rather the net natural gas prices that Greece is charged with. What room is there for these to be adjusted downwards through re-negotiation is anyone’s guess.

Time to wrap this up. Mainstream media pepper us with various reasons why Greek manufacturing cannot catch a break. Some of these are legitimate and others should be taken with a pinch of salt. It always comes back to a couple of facts though, the adjustment process has started off a very low base and a change in mentality is badly needed and this is where adjustment is even slower, if any.

P.S. It is interesting to add a little twist to the debate about natural gas prices that Greek manufacturers are charged with. The lower a country’s produce value added component is the more adverse the impact of gas prices charged.

source: Eurostat, own calculations

Considering the multiple of headline productivity figure for Greek manufacturing to the price for top-bracket natural gas consumers, Greece falls to the middle of the relative table. Using that yardstick, the most expensive natural gas on that basis is paid by Portugal.

(I know that this is a very crude measure and given the financial stress that Greek firms are under it may underestimate the impact of natural gas prices paid but it still is significant).