How inflation increases twin deficits

By Tasos Dasopoulos

The looming prolongation of the energy crisis with the increases in electricity, gas and oil prices, combined with the new outbreak of the pandemic, comes to strengthen the “twin” deficits, the fiscal and the current account balance, which reappeared at the end of 2020. due to the pandemic.

The trade deficit that is part of the current account balance has already begun to grow. According to the Bank of Greece, the fuel deficit widened to 639.7 million euros in August (the last month for which there are published data), when no one was yet worried about the rapid rise in fuel prices. , from 347.7 million euros in the same period of 2020, considering that it is mainly due to the opening of the market and the increase of economic activity.

The commodity transactions recorded by ELSTAT could be used as a “precursor indicator” for the continuation of the year. In the comparison of September with the same month of 2020, the value of fuel imports reached 4.3 billion euros this year, compared to 3.7 billion euros in the same period of 2020, recording an increase of 17.9%. For the period January-September, and with the first five months of the year the economy is in lockdown, the value of fuel imports reached 10.84 billion euros this year, compared to 6.4 billion euros in the same period of 2020. Such a development is explained only in part by the recovery of the economy, and in large part by the rise in oil, gas and electricity prices, which had begun to become apparent.

Starting from record lows in the middle of last year, commodity energy prices have been rising since the beginning of the summer, with a steadily rising rate. This was not immediately apparent in the trade balance, because along with the value of imports we also had a double-digit increase in exports, so the trade deficit was growing at a controlled pace.

In fact, in the current account, where exports and imports of products and services add up, the deficit for the 8 months of January-August decreased by 2.5 billion euros to 5.4 billion, from 7.9 billion in the same period. 2020. Especially for the month of August, the balance is positive. The BoG records a surplus of 1.4 billion euros, compared to a deficit of 150.8 million euros in the same month of 2020. The answer lies in the large increase in tourism, especially from July onwards, which is compared to the same period in 2020. , when tourism, due to the pandemic, had a reduction in turnover by 73% compared to 2019.

The danger of winter

However, entering the autumn and winter months, when the impact of tourism is gradually decreasing, while the needs for fuel consumption are increasing, the scene has changed. Electricity producers announced tariff increases, which came to meet huge increases of 600% in gas prices and a 60% increase in oil prices. At present the financial staff has focused its action mainly on reducing the increases in the tariffs of consumers and micro-enterprises.

The largest companies will fatally pass the increased cost of energy and raw materials to retail prices. Prices will remain high as long as consumption remains at the same level, fueled by deposits of 36 billion euros raised during the pandemic.

However, the permanent losses in the foreign deficit, ie the current account deficit of Greece, which is a criterion of competitiveness of the economy and in turn determines the external debt of the country (ie the total debt of the state and companies outside Greece), will judged by two factors: the final height of fuel prices before they embark on a de-escalation trajectory and the time it will take for them to return to normal levels.

The budget deficit

The second part of the deficit twin, the budget deficit, has been under pressure since the beginning of the year, due to the prolongation of the pandemic, which now seems to be escalating from the return of the pandemic and the emergence of significant inflationary pressures. of inflation, which from -2% at the beginning of the year reached 3.4% at the end of October, recording an increase of 5.4% in 10 months.

The pressures on this part of the deficit twin come from calls for new support measures demanded by representatives of the real economy to protect themselves from both the energy crisis and the restrictive measures that have been activated to limit the spread of the unvaccinated. Requests for subsidies to reduce the impact of increases in energy prices will directly hit the deficit, especially if made from Budget money.

The same goes for requests coming to the financial staff from retail and catering concerning the postponement of the payment of installments for the debts of 2.5 billion euros that were created due to the pandemic or the 3.5 billion that should be be repaid from the repayable advances of 8 billion euros given in the two years 2020-2021.

In the first case, the subsidy will increase expenditure for 2021 and in the second case it will reduce the planned budget revenue for 2022. In both cases it will increase the deficit for the two years 2021-2022 in a period after the crisis coronavirus, to which it should be reduced.

The financial staff, so far, seems to be resisting the demands for new deferrals of payments, while for the subsidies it gives against the revaluations, it uses the additional income from the auctions of the pollutants that have no effect on the deficit. And in this case, as in the current account deficit, everything will be judged by the duration of the phenomenon of increased cases that imposes restrictive conditions for a portion of citizens and energy prices.

With regard to the development of international prices, however, the initial optimism that prices will begin to de-escalate by the end of the first quarter seems to be weakening, as the European Commission now estimates that the de-escalation should not be expected before the end of the first half of 2022.