Greece's Economic Output Gap

As most of us are aware, the Greek economy is hardly firing on all cylinders, with or without a resolution of its ongoing debt problems.  One measure, the economic output gap, provides us with a measure of how an economy is performing when compared to its full economic capacity.  Data from Economy Watch gives us a good sense of how poorly the Greek economy is performing when measured using output gap.

Let's look at the definition for output gap:

The output gap is a measure of the difference between actual output (Y) and potential output (Yf) or Y minus Yf.

Output gaps can be positive or negative.  A negative output gap occurs when actual output is lower than potential output.  This is also termed a deflationary or recessionary output gap because the economy is producing less than it is capable of producing.  This results in low levels of economic growth and higher levels of unemployment and may result in low inflation or even deflation.  A positive output gap occurs when economic growth is above the long-term trend.  It can also be termed an inflationary output gap because the economy is producing at higher than normal levels.  Economic growth levels are high and unemployment is low, creating a situation where inflationary pressures may occur.

Now, let's look at Greece's output gap:

We can easily see how well Greece's economy was performing prior to the Great Recession with the output gap peaking at +10.041 percent in 2007.  Even during the Great Recession, while the output gap fell, it remained in positive territory until 2011 when it fell to -2.651, the first negative output gap since 2002.  By 2013, the output gap had dropped to -10.524 percent and has remained negative since.  The projected output gap for 2015 is -6.846 percent.

Just for fun, let's compare Greece's output gap (in blue) to that of the United States (in red):

While the U.S. economy has not performed up to its capacity since the Great Recession, its output gap reached -4.941 percent in 2011, less than half the level that Greece reached in 2011 and has shown some improvement since then, however, it is quite apparent that it can take many years to reduce a negative output gap after a significant economic contraction.

What has this high negative output gap done for Greece's unemployment?  Here's the answer:

Things look even grimmer for younger Greeks between the ages of 15 and 24 as shown here:

With one in two young Greeks finding themselves without work, the future for Greece's economy looks dire.

Now that Greece has decided to "go it alone", the stress on the nation's economy is likely to grow as the nation's uncertain future with the Eurozone becomes reality, pushing the negative output gap back up to the record high levels last seen in 2011.