Morgan Stanley’s Daniele Antonucci has a new note on Greece titled Greece: From Shake-Up to Shape-Up?
It’s the first note we recall seeing in ages that wasn’t an analysis of the country’s sovereign debt situation, or whether it would be forced to leave the Eurozone, or whether the latest bailout would be sustainable or not.
The note is about Greece’s, economy, and whether the light at the end of the tunnel might be coming into visibility.
The answer is: Maybe.
An actual recovery isn’t here yet, but Antonucci’s argument is that a massive amount of uncertainty and tail risk has been removed, and that analysts under-appreciate how much the uncertainty of a Eurozone exit or default was impeding economic activity.
From the note:
Growth will come from the progressive attenuation and elimination of four shocks: 1. Credit crunch; 2. Fiscal austerity; 3. Structural change; 4. Euro exit worries. We believe that most investors underestimate the impact of the huge uncertainty that these shocks have exerted on economic activity and the public finances.
(This was actually something I heard when I was in Greece last summer. The real economy killer was not the austerity, but rather the collapse in investment activity, that was in part the result of everyone thinking Greece was on the verge of leaving the Eurozone.)
The good basically boils down to three points:
Economy – recession alleviating: A recovery hasn’t started yet, but activity data are becoming less bad, as the shocks that hit the Greek economy, including euro exit worries, are starting to dissipate.
Competitiveness gap closing: With unit labour costs likely to fall further, the incentive for Greece to exit the eurozone to boost competitiveness via a weaker exchange rate is no longer there.
Primary surplus almost achieved: We expect Greece to reach a primary budget surplus this year and maintain it thereafter. It’s likely to be only fractional in 2013, but will gradually rise to over 3% of GDP.
On the competitiveness gap, one only needs to look at this chart of unit labour cost trajectories to see Greece coming more into line with its Eurozone peers.
Photo: Morgan Stanley
On the economy side, there’s some evidence that the industrial side of the economy is experiencing what we used to call “green shoots”
Photo: Morgan Stanley
Bottom line: The economy in Greece is still horrible.
But with Eurozone uncertainty disappearing, the government coffers going back into primary surplus (which makes debt worries less acute), and wage competitiveness emerging, there may be hope for improvement soon.