Athens shops pull down shutters on recovery hopes Monday, 06 September 2010 03:57

here are more employees than clients in Andreas Triandafillidis’ clothes shop in central Athens. Austerity has kicked in and the shirts stay on the shelves despite a 50 percent discount.

“People just walk by, they don’t even look at our window,” said Triandafillidis, 58, standing in the near-empty shop at the end of the summer sale season. His revenues are down 30 percent and many neighbouring shops have shut — nearly 1 in 5 in the centre according to the Greek retailers’ association.

The rows of empty shops show the debt crisis has now entered a new stage, spilling over from financial markets and newspaper headlines to the streets under the impact of a drastic austerity plan aimed at bringing the country back to fiscal health.

Civil servants wage cuts, pension freezes, a 4 percentage point increase of VAT to 23 percent this year, fresh excise taxes and overall concerns about recession have shrunk consumption and sent retail sales to a 7-year low.

The drop in public consumption had so far been broadly in line with expectations given the size of the austerity package.

But analysts warn the backlash will get stronger in the coming months as the effect of the austerity sinks in, threatening the growth needed to meet deficit-cutting targets in a country where private consumption accounts for 70 percent of economic output.

“The danger is that by tightening fiscal policy that much it may actually be counterproductive for the fiscal targets, it might actually kill off any kind of activity,” said Diego Iscaro, at IHS Global Insight. “The impact on activity may be huge and it’s what we are seeing at the moment.”

FRIGHTENED CONSUMERS

Shrinking retail sales are hitting tax collection, already below plan with ordinary budget revenues in January-July standing ¤770m short of a ¤29.4bn target, even though the VAT hike and a drive to get shops to issue more tax receipts partly compensate the drop in consumption.

The slump continued in July and August with the worst summer sales in over a decade, down by a quarter from an already weak 2009, said Vassilis Korkidis, chairman of retail trade association ESEE, predicting that tens of thousands more shops were likely to close as austerity measures sink in.

Consumer confidence is at record lows and retailers all around Athens, from pharmacies to clothing and stationery shops, report that clients have cut shopping to essentials, postponing buying that extra shirt or cosmetic product to better times.

Clothing shops have been hit hardest, together with footwear and department stores, data shows, with annual drops of as much as 20 percent in April and over 10 percent in June, while retail sales overall slipped by 4.4 percent in June.

“The economic adjustment program is frightening consumers,” Korkidis said, adding that only mobile phones and internet services were in the black, in a sign that people were adapting habits to austerity, staying indoors to surf the internet rather than going to a restaurant.

Some analysts say the drop in domestic consumption may be a necessary painful step towards reforming the economy and boosting lagging competitiveness—if it is accompanied by the right structural reforms and accepted by the public.

“There is going to be pain in the short term ... more closure of businesses, more increase of unemployment in the next 1-2 years,” said Platon Monokroussos, economist at EFG Eurobank. “(But) we need to have a decline in domestic economic activity to reduce the external imbalance and drive inflation lower.”

Analysts say that despite lagging revenues and public discontent, the Socialist government, which has drastically cut spending, is likely to meet or only narrowly miss a target to cut the budget deficit to 8.1 percent of GDP this year, with recession in line with a -4 percent forecast.

But down the line, shrinking consumption will take more of a toll and public support may wane further, with analysts citing social unrest as a significant risk in a country where people are prone to take to the streets.

“You wonder ... whether the government will still have the political support to carry on this policy in 2-3 years’ time, I think it’s unlikely,” Iscaro said, adding this was the main risk to achieving the EU/IMF targets.

Support for the ruling party has slipped under 30 percent although Prime Minister Papandreou remains relatively popular. Businesses are also angry, with 7 in 10 small enterprises saying government cuts will make things worse, a poll by the confederation of small businesses GSEVEE showed, forecasting that 20 percent of small enterprises were likely to shut down.

But analysts say the government has little leeway to respond to calls to cushion the impact of austerity as it focuses on slashing its deficit under the terms of the ¤110bn EU/IMF bailout that saved it from bankruptcy in May. The government cannot spend money to protect jobs or offer a stimulus package, analysts said. Plans to put an end to monopolies and slim down the state may boost the economy in the longer term but will add to strains in the meantime.

Papandreou’s cabinet must press ahead or face restructuring the country’s debt, an option it has repeatedly ruled out.

reuters

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