Eurobank analysis: Crisis made investments’ share of GDP lowest in EU

One of the effects of the economic crisis – or ‘Greek Great Depression’ – was to markedly alter the composition of Greece’s GDP, driving down total investment to the lowest rate in the European Union while at the same time increasing private consumption as a percentage of total GDP, according to a Eurobank report issued on Friday.

According to an analysis published in the last issue of Eurobank’s weekly bulletin “7 Days Economy”, private consumption rose 5.1 percentage points as a percentage of total GDP, from 64.8 pct in 2007 to 69.9 pct in 2015, reaching the highest percentage share of GDP in the EU28 countries.

The share of public spending in that time fell only marginally, by 0.4 percentage points, from 20.5 pct of GDP to 20.1 pct of GDP, while gross fixed capital formation collapsed, falling 14.5 percentage points from 26 pct of GDP to 11.5 pct of GDP in that period. The share of exports increased by 9.4 percentage points (from 22.5 pct to 31.9 pct) and that of imports fell by 3.2 percentage points, from 35 pct to 31.8 pct.

The increase in the share of private consumption was attributed to a process of supporting consumption rates via a reduction of Greek households wealth, such as housing, stocks, bonds and deposits. The greater share of exports was a result of a higher demand for goods and services abroad than domestically.

According to the analysis, these changes track those seen in the U.S. economy during the Great Depression of 1929-1933, especially with regard to the shares of private consumption and investment. In the U.S. during that period, the contribution of private consumption to total GDP increased by 10 percentage points, from 62 pct in 1929 to 72 pct in 1933, while investment slumped by 16 percentage points, from a 25 pct share of GDP in 1929 to a 9 pct share in 1933. In the first stage of economic recovery in the U.S. (from 1933 to 1939) the share of private consumption returned to pre-crisis levels and the share of investment increased to 16 pct.

In comparison with the EU, the share of private consumption in Greece as a percentage of GDP (69.9 pct) is 13.6 percentage points higher than the EU28 average (56.3 pct) and 15 percentage points higher than the average in the Eurozone (54.9 pct). Investment conversely, at just 11.5 pct of total GDP, is 8 percentage points lower than the EU28 average (19.5 pct) and 8.2 percentage points lower than the Eurozone average (19.7 pct).

The analysis notes that a country’s GDP profile is a fundamental restriction on the use of resources in an economy. Increasing the share of investments, it adds, is an essential condition for returning the Grek economy to sustainable economic growth and requires a recovery in the share of private savings, not excessive government budget surpluses and possibly, for some time, a controlled trade balance deficit.