International Journal of Economy, Management and Social Sciences, 2(7) July 2013, Pages: 507-512

TI Journals

International Journal of Economy, Management and Social Sciences

ISSN
2306-7276

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The Impact of Greek Economic Crisis on

Profit of the Greek Construction Industry
Nikolaos Eriotis *1, Evangelos Poutos 2, Evgenios Retsinis 3, Dimitrios Vasiliou 4
1

Ass. Professor of Accounting, National and Kapodistrian University of Athens, 5 Stadiou Street, GR 105 62, Athens, Greece. Tel: 0030 210 8259886-9.
Adjunct Lecturer of Accounting, National and Kapodistrian University of Athens, 5 Stadiou Street, GR 105 62, Athens, Greece. Tel: 0030 210 3689391.
3
Analyst, MBA in Engineering - Economic Systems, N.T.U.A., 23 Loid Tzeorge Street, GR 117 44, Athens, Greece. Tel: 0030 6944916187.
4
Professor of Bank Management, Hellenic Open University, 57-59 Bouboulinas Street, GR 262 22, Patra, Greece. Tel: 0030 2610 367482.
2

AR TIC LE INF O

AB STR AC T

Keywords:

The present study analyzes the impact of the Greek economic crisis on the construction industry,
using variables which depict both the Greek economic environment and the corporate income
expenditure management by the Greek construction firms. We hypothesize that in a weak
economic environment, with negative perspectives, the earnings of the companies traded in the
economy are affected by both corporate parameters and the general countrys economic trend. Our
findings support this hypothesis, since the earnings of the firm are affected by the firms efficient
income expenditures management and by the countrys economic environment. Furthermore, our
analysis shows that the gap between operating income and operating expenditure acts as a pillow
when economy shrinks. In the Greek case it seems that this gap was not enough to absorb the
negative effect of the Greek economic crisis on the construction sector, which now faces negative
results.

Construction Sector
Operating Expenditure
Operating Income

2013 Int. j. econ. manag. soc. sci. All rights reserved for TI Journals.

1.

Introduction

The global financial crisis of 2008 forced governments to support the private sector due to great losses created by lack of confidence in the
market (De Grauwe, 2010, [15]). Governments tried to reduce private debt mostly by financing the banking sector. This choice had a
negative impact on the economy since the financial losses of the private sector transferred and distributed to public, affected negatively the
national economies and the euro zone (Blundell-Wingall and Slovic, IMF 2010, [14]). In such a negative economic environment countries
with structural problems had to try harder to overcome the crisis. Greece is one of the economically weakest countries in EU since it is in a
dire financial position due to the high budget deficits, with a significant increased 38.2% public debt, as percentage of GDP, over the period
2007-2010 (Kouretas, Vlamis, 2010, [22]). Furthermore, the weak political system of Greece led the country into crisis (Eichengreen, 2007,
[17]). The economic activity in Greece has been affected negatively by the crisis which started globally during the year 2008 and continued
locally to weak countries. As far as Greece is concerned its GDP started to decline after 2008, where within three years (2009 2011) it
was decreased by 13.4%. Additionally, unemployment that was declining up to 2008 started to grow, thus, from the negative change in the
rate of unemployment from 2006 to 2008 (-25.28%) Greece faced a positive change in the unemployment rate with an increase of
unemployment by 98.18% from 2009 to 2011 (see table 1). Furthermore, the average borrowing cost for the Greek non financial firms that
was increasing for the years 2006 and 2007 due to competitive demand from the Greek households, then decreased during the second
semester of 2008 and the first of 2009 due to decreased demand and increased thereafter due to high country risk. Finally, the Greek
economic environment indicator (index of economic conditions) that was constantly increasing up to mid-2008 started to decline from 2009
up to 2011, where its cumulative loss reached 36.4% (see table 2).
Table 1. Macroeconomic Data for the period 2006-2011.

Year
2006
2007
2008
2009
2010
2011

G.D.P.
(m.euro)
208,893.00
217,248.72
223,548.93
219,077.95
209,219.44
194,783.30

Annual Perc/ge
Change (%)
4.3
4.0
2.9
-2.0
-4.5
-6.9

Unemployment Annual Perc/ge Inflation Borrowing cost for

Percentage (%)
Change (%) Rate (%) non financial firms
8.9
-10.10
3.2
7.18
8.3
-6.74
2.9
7.54
7.6
-8.43
4.2
7.61
9.5
25.00
1.2
6.07
12.5
31.58
4.7
6.25
17.7
41.60
3.3
7.50

Source: Annual Reports of the Bank of Greece for the Fiscal Years 2006, 2007, 2008, 2009, 2010, 2011
and Statistical Bulletins of Economic Research, Bank of Greece, Issues 133, 140, 141, 142, 143 (combination).

* Corresponding author.
Email address: nikolaos.eriotis@econ.uoa.gr

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Inter nat ional Journal of Economy, Manage ment and Social Scie nc es , 2(7) July 2013

Table 2. Index of Economic Conditions in the EU, the Eurozone and Greece for the time period 2006-2011.

Index of Economic Conditions in the EU, the Eurozone and Greece for the time period 2006-2011, Index 1990-2010=100
Year

European Union

Euro zone

Greece

2006

108.30

107.10

104.10

Index of Economic Conditions in Greece, Annual

Percentange Change (%)
10.6

2007

111.20

109.40

108.10

3.8

2008

93.40

93.70

95.60

-11.6

2009

79.60

80.70

76.30

-20.2

2010

101.70

100.90

75.10

-1.6

2011

100.70

101.40

72.80

-3.1

Source: Statistical Bulletins of Economic Research, Bank of Greece, Issues 133, 140, 141, 142, 143 (combination).

Our research analyzes the impact of Greek economic crisis on the construction industry, a sector that, before crisis, used to be the
cornerstone of the Greek economy. Our hypothesis is that construction activity in Greece was affected not only by sectorial changes but
also by the Greek economic environment. Prior to 2008, the participation of construction on GDP constituted almost the 7% of the
domestic production, whereas after 2008 fell on average by 3%1. Three years prior to crisis, construction activity was increasing with
annual percentage change of 8.90%, 7.57% and 9.25% for the years 2006, 2007 and 2008 respectively, whereas during the next three
consecutive years there was a big decline by -2.80%, -11.32% and -17.11% respectively (see table 3). Similarly, the index of sales from
architects engineers activities increased by 8.10%, 13.88% and 9.02% for 2006, 2007 and 2008 respectively, but decreased by -18.63%, 20.42% and -19.22% for 2009, 2010 and 2011 respectively (table 4). Also positive are the results from the monthly survey of construction
executed and expected to be executed for the years 2006 up to 2008, whereas the sign terns negative for the next three years (see table 5).
Table 3. Construction Activity in the period 2006-2011.

Construction Activity
Year

Volume of Construction
Activity
(thousands tons of
cement)

Annual
Percentage
Change (%)

Public
Investments
(millions euro)

Annual
Percentage
Change (%)

2006

15,880.00

+3.10

8,184.00

+8.90

2007

14,419.00

-9.20

8,803.30

+7.57

2008

13,978.00

-3.06

9,617.90

+9.25

2009

10,992.00

-21.36

9,348.90

-2.80

2010

9,417.00

-14.33

8,290.60

-11.32

2011

5,861.00

-37.76

6,872.20

-17.11

Source: Statistical Bulletins of Economic Research, Bank of Greece, Issues 133, 140, 141, 142, 143 (combination).

Table 4. Index of Sales from the Activities of Architects-Engineers for the period 2006-2011.

Index of sales from the activities of Architects-Engineers

Year

Index 2005=100

Annual Perc/ge Change (%)

2006

108.10

+8.10

2007

123.10

+13.88

2008

134.20

+9.02

2009

109.20

-18.63

2010

86.90

-20.42

2011

70.20

-19.22

Source: Statistical Bulletins of Economic Research, Bank of Greece, Issues 133, 140, 141, 142, 143 (combination).
1

Annual Report Developments in the Greek construction sector of the Pan-Hellenic Association of Technical Societies, 2012.

The Impact of Greek Economic Crisis on Profit of the Greek Construction Industry

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Internat ional Jour nal of Economy, Mana ge ment and Social Sciences , 2(7) Jul y 2013

Table 5. Monthly Survey of Total Construction Work for the period 2006-2011.

Monthly Survey of Total Construction Work

Monthly Survey of Total Construction Work

Work Already Executed on the Previous Quarter

Works to be Performed

Year

Sum of
Constructions

Residences

Other
Buildings

Public
Works

Sum of
Constructions

Residences

Other
Buildings

Public
Works

2006

12

24

13

-45

-22

-46

-50

2007

10

-11

16

11

-33

-22

-30

-37

2008

10

-22

26

-29

-39

-23

-30

2009

-16

-31

-29

-8

-43

-52

-56

-36

2010

-39

-58

-28

-41

-63

-85

-46

-68

2011

-53

-64

-27

-67

-81

-92

-68

-84

Source: Statistical Bulletins of Economic Research, Bank of Greece, Issues 133, 140, 141, 142, 143 (combination).

The structure of this paper is as follows: the next section, section 2 addresses the literature review, section 3 summarizes the data used, the
theoretical background of the econometric model and our methodology, section 4 presents the results of the econometric model and section
5 presents the final concluding remarks.

2.

Literature Review

This section discusses related researches that have been conducted in the past and use similar approach to ours. According to our research,
there is no prior study concerning the construction sector, but there are other researches that combine corporate figures with
macroeconomic variables in order to explain the impact of them on the business results of other economic activities. M. Kaabia and J. Gil,
(1992), [21], explain the economic activity of the Spanish agricultural sector by combining two groups of independent variables, the first
group contained macroeconomic variables of Spain and the second group consisted of independent variables related to the agricultural
sector. One of the macroeconomic variables used in their research was interest rates, more specifically the quarterly interest rates.
Additionally, G. Zanias, (1996), [26], points out in his work on the effect of macroeconomic and microeconomic variables, the effect of
interest rates on financing costs of farming. Furthermore, N. Dritsakis, (2005), [16], in an effort to investigate the impact of
macroeconomics in the agricultural sector takes into account variables among which the gross domestic product. As far as the corporate
variables are concerned, N. Therios, (2002), [25], studies the productivity and performance gains in terms of business by using econometric
models where the independent variables include the net operating profit, the value of sales, total fixed assets, total current assets, equity,
short-term liabilities and the cost of capital through interest rates. Finally, R. Seguy and J. Ramirez, (1975), [23], attempt to develop a
macroeconomic model to calculate the national income of Mexico. The model focuses on the three most important sectors of Mexico,
which is the agricultural, the mining and the transport sector.

3.

Data and Methodology

Our sample data cover the 67% of the construction companies traded in the Athens Exchange from 2006 up to 2011. The main reason using
the firms listed on the Athens Exchange is that it operates under specific standards and regulations, ensuring the consistency of the recorded
and used data. Additionally, all the firms listed on Athens Exchange publish their accounting records according to IAS providing a uniform
presentation of information for our sample. Our sample data used in our model estimation are based on the public financial statement of the
construction section of the firms listed on the Athens Exchange. The data from the balance sheets and income statements provide us with
useful information concerning the total assets, liabilities, operating profits, turnovers, operating income and operating expenses.
Based on our hypothesis, that the results of the firm are affected not only by corporate figures but also by macroeconomic factors as well,
we create our model. Thus, we consider as dependant variable the operating results y i of the firm (i) expressed as percentage of the total
sales, and explanatory variables the total operating revenues (X1) and expenses (X2) scaled by the size of the firm, the non financial firms
mean yearly borrowing rate (X 3) and the annual percentage change of the index that measures the Greek economic environment (X4):

yi ,t a1 X 1,t a 2 X 2,t a3 X 3,t a 4 X 4,t et

where,

et is the error

term and t the year. Our first model was enriched by two more macroeconomic variables, the annual percentage

change of construction activity index (X5 ) and the annual percentage change of GDP (X6), where we found that the macroeconomic
variables X4, X5 and X6 are highly correlated; thus, we reject the last two variables from our final model hypothesizing that variables X3
and X4 better reflect the macroeconomic environment of the Greek economy related to the construction sector.

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Inter nat ional Journal of Economy, Manage ment and Social Scie nc es , 2(7) July 2013

Thus, our estimated model consists of two corporate variables (X1 and X2 ) and two macroeconomic variables (X3 and X4) representing the
impact of the economy on the corporate results. As far as the model expecting estimation is concerned and the two corporate variables, we
expect to find a positive relation of the dependent to X1 variable, since the earnings of the firm are positively affected by the operating
income of the firm. Similarly, we expect to find a negative coefficient for the operating expenditures, variable X 2 in the model. These two
variables, X1 and X2, represent the operating efficiency of the firm and its ability to create earnings given the economic environment.
Additionally, we expect to find a negative impact of the interest rate since the cost of borrowing has a reverse impact on the earnings,
whereas the economic environment index is expected to affect the earnings positively.
Table 6 shows the annual average values of the independent variables and the dependent variable for each year for all sampled companies.
The average annual ratio of net operating profits to sales (y) decreases during the whole sample period while it becomes negative after
2008. Additionally, the average annual ratios of operating income and operating expenditures to total assets are decreasing continuously as
firms adjust their cash flow to the new economic environment. Finally, the index of economic environment in Greece as an annual
percentage change of the previous year increased in 2006 and 2007 showing the economic prosperity that prevailed at that time and in
2008, 2009, 2010 and 2011 is reduced proving the weak Greek economy and its growing economic crisis.

Table 6. Annual Average Values of Model Variables.

Model variables

4.

Year

X1

X2

X3

X4

2006

0.0575

0.6367

0.6204

7.18

10.60

2007

0.0413

0.5138

0.4968

7.54

3.84

2008

-0.0576

0.5113

0.5125

7.61

-11.56

2009

-0.1317

0.3992

0.4045

6.07

-20.19

2010

-0.5498

0.3014

0.3434

6.25

-1.57

2011

-3.9116

0.1996

0.2733

7.50

-3.10

Results

Our empirical investigation provides us with interesting results, since it consistently describes the Greek construction sector, which is
affected not only by the corporate decisions but by the countrys economic environment as well. The estimated model results are presented
in table 7, where we find a high F statistic value and an R 2adjusted at 0.52 denoting that 52% of the variation of the earnings can be
explained by the independent variables of the model, adjusted for the number of predictors and the sample size.
According to our findings all model variables are statistically significant, denoting that our initial assumption that the firms results are
affected by both, corporate and macroeconomic variables; therefore it represents the effective operation of the firm and the economic
environment, where the firm produces and sells its products, respectively. On one hand, the two corporate variables (X1 and X 2) are
statistically significant with signs, as theoretically expected, positive for the X1 variable and negative for the X 2. Furthermore, the
coefficients of these two variables are 20.23 for the income and -19.86 for the expenditures; since the income coefficient is greater than the
expenditures coefficient we can say that the firms results are negatively affected by the corporate management. Nevertheless, it is true that
the greater the gap between X 1 and X 2 coefficients, the higher the profit margin and the lower the possibility to present negative results due
to external corporate factors. On the other hand, the two macroeconomic variables X3 and X4 are also statistically significant with signs as
theoretically expected, that is negative for the X3 variable and positive for the X4. The negative sign of the X3 variable represents the cost of
borrowing, which, according to financial theory, increases as the risk of the firm increases. In our case we use the average cost of
borrowing, which incorporates the average risk of the Greek company. Finally, the X4 variable that represents the Greek economic
environment is positively related to earnings, since an improvement in the Greek economic environment will affect the earnings positively
and vice versa. The results of the regression are presented in the next table, table 7:
Table 7. Results.

yi ,t a1 X 1,t a 2 X 2,t a3 X 3,t a 4 X 4,t et

Y
1
2
3
4
R-squared
Adjusted R-squared
S.E. of regression
F-statistic

Coefficient
20.23102
-19.86920
-0.399204
0.633624
0.549610
0.525482
2485.160
22.77890

Std. Error
t-Statistic
3.708201
5.455751
3.764439
-5.278131
0.027163
-14.69681
0.057471
11.02510
Mean dependent var
S.D. dependent var
Durbin-Watson stat
Prob(F-statistic)

Prob.
0.0000
0.0000
0.0000
0.0000
-1032.264
3607.680
1.141864
0.000000

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Internat ional Jour nal of Economy, Mana ge ment and Social Sciences , 2(7) Jul y 2013

5.

Conclusions

The present study attempts to quantify, by forming a linear model, the impact of the Greek economic crisis on the construction sector, one
of the cornerstones of the Greek economy. Firstly, we examine the macroeconomic environment of Greece in order to understand the
macroeconomic factors that affect the Greek construction industry. From macroeconomic point of view, we realized that before the Greek
economic crisis all the relative figures in accordance to the construction sector were positive representing a prosperous economic
environment. After the global financial crisis, where lack of confidence appeared in the market, and the deep Greek recession, the Greek
macroeconomic figures along with the construction sectors ones express the difficult status of the Greek construction industry.
We hypothesize that in a weak economic environment, with negative perspectives, the earnings of the companies traded in this environment
are mainly affected by both corporate parameters and the general trend of the economy. We tested our hypothesis on the Greek construction
sector. Our findings prove to support this hypothesis since the earnings of the firm are affected by the efficient management of the firm and
by the economic environment. Furthermore, our analysis shows that the gap between operating income and operating expenditure acts as a
pillow when economy shrinks. In the Greek case it seems that this gap was not enough to absorb the negative affection of the Greek
economic crisis on the construction sector, which now faces negative results.
This research analyzes the impact of the Greek economic crisis on the earnings of the construction industry combining both the companys
effective management and the impact of the general economic climate. Even though this research tests the impact of the Greek economy
crisis on the construction sector, there are many other sectors that have been affected by this phenomenon; investigating them and their
characteristics it might be helpful to understand the impact of the crisis on them and finally help them to recover.

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