Eurobank: Manufacturing resistant to inflationary pressures

Manufacturing remains resilient to inflationary pressures from rising energy prices, Eurobank Research points out in the latest issue of “7 Days Economy”, but points out that there are downside risks on the supply side.

Eurobank Research states in detail in its Bulletin:

“Annual inflation in Greece, measured on the basis of the Harmonized Index of Consumer Prices (HICP), increased to 2.8% in October 2021 (4.1% in the Eurozone) from 1.9% and -2.0% in September 2021 and October 2020 respectively (see Figure 1) Taking into account the weights of the individual groups of goods and services, the increase in the general price level in Greece in October 2021 came mainly from the housing categories (includes electricity and gas consumption) , transport and food and soft drinks Undoubtedly, a large percentage of inflation, both in Greece and abroad, is related to rising energy prices.

Figure 1: Greece and Eurozone – Inflation Based on the Harmonized Index of Consumer Prices. Source: ELSTAT, Eurostat, Thomson Reuters Eikon, Eurobank Research

In the 10 months of January-October 2021, the average HICP recorded a marginal annual decline of 0.1% from -1.1% in the corresponding period in 2020. According to the autumn forecasts of the European Commission (November 11, 2021), the average annual inflation in the 12 months of January-December 2021 is estimated at 0.1%, reflecting the decrease in the general price level in the first half of 2021 and its increase thereafter. Inflation is projected to increase to 1.0% and slow to 0.4% in 2023. These forecasts are compatible with the scenario of a temporary rise in inflationary pressures. However, as pandemic outbreaks continue, forecasts for most macroeconomic variables are subject to high uncertainty. Especially for inflation, it is useful to take into account the disturbance from the large increase in the money supply by the individual Central Banks.

Production increase in manufacturing in September 2021 (3.9% MoM, 11.4% YoY)

According to the seasonally adjusted data of ELSTAT, the production index in manufacturing increased by 3.9% MoM / 11.4% YoY in September 2021 from -0.2% MoM / 6.1% YoY in the previous month (see Figure 2 ). The average of this index in the 3rd quarter of 2021 increased by 0.6% QoQ / 7.7% YoY from 1.4% QoQ / 14.6% YoY in the 2nd quarter of 2021. This slowdown, in qualitative terms, It is expected to be reflected in the real growth rate of the 3rd quarter of 2021. At present, the manufacturing sector is showing resilience to rising energy prices. However, there are downside risks on the supply side. As characteristically mentioned in the research of IHS Markit for the manufacturing PMI index in Greece in October 2021, the negative disruptions in the supply chain are expected to be a threat to the production in the next period.

Figure 2: Greece – Production Index in Manufacturing, Seasonally Adjusted Data. Source: ELSTAT, Eurobank Research

The recovery in domestic demand widened the trade deficit (excluding ships and oil) by € 2.0 billion or 17.0% in the 9 months of January-September 2021

Greek exports of goods, excluding ships and petroleum products, amounted to € 2.5 billion at current prices in September 2021, recording an annual increase of 22.6% from 8.1% in September 2020. In the 9 months January-September 2021, amounted to € 20.8 billion in current prices, recording an annual increase of 19.2% from 1.8% in the corresponding period last year. The corresponding imports of goods moved at similar rates, showing an annual increase of 17.8% in September 2021 (3.8%, September 2020) and 18.3% in the 9 months January-September 2021 (-4.6%, January-September 2020 ). Based on the above results, the trade deficit, excluding ships and oil, increased on an annual basis by € 2.0 billion or 17.0% in the 9 months January-September 2021 from an annual contraction of € 1.7 billion. or 12.9% over the corresponding period in 2020 (see Figure 3).

Figure 3: Greece – Trade Balance, Excluding Ships and Petroleum. Source: ELSTAT, Eurobank Research

The decline in domestic demand in 2020, mainly due to falling private consumption, has resulted in a contraction in imports. At the same time, exports of goods, in contrast to exports of services, have shown resilience to the COVID-19 coronavirus pandemic. As a result, the trade deficit narrowed. This trend was reversed in 2021 (based on the January-September 2021 observations), with the strengthening of domestic demand leading to an increase in imports and a widening of the trade deficit.

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