ANALYSIS
Investment strong, but build-up of stocks a concern
Financial sector also booms
Preliminary figures from the Statistical Service (CYSTAT) giving a full breakdown of gross domestic product (GDP) figures in 2004 show that real GDP growth recovered to 3.7%, up from 1.9% in 2003, and was thus slightly higher than recent estimates by the government and private-sector economists.
Analysis by the Financial Mirror shows that on an expenditure basis, the consumer was one of the primary reasons for the recovery. Private consumption, which accounts for almost two-thirds of the whole economy, grew in real terms by 6.1% year on year, having grown by a meagre 1.9% in 2003.
Other data from CYSTAT suggest that consumer spending was concentrated on new cars, sales of which surged after the steep cuts in excuse duties, and on furniture and household items, which enjoyed a boom after strong property sales in 2003.
Surge in investment
There was also a surge in investment: gross fixed investment grew in real terms by a strong 9.1%, compared with a contraction of 1.9% in 2003.
Encouragingly, much of this investment was concentrated in areas that should lead to improvements in business productivity: investment in machinery and equipment rose in real terms by 23.9%, and now accounts for 25.7% of all gross fixed investment.
Construction investment, on the other hand, slowed. Investment in new buildings and appears to have been concentrated in infrastructure works, as indicated by “other construction works”, which rose by 7.5%. Despite the proliferation of building sites, investment in dwellings recorded only a 0.1% increase in real terms, while investment in non-residential buildings rose by 3.8%.
Investment remains low as a proportion of GDP, however, reaching 18.5% in 2004, compared with the 25% of GDP generally considered to be ideal for advanced economies.
Government’s impact negative
The government, on the other hand, had a negative impact on the economy as it pulled back spending to rein in its budget deficit. Government consumption declined in real terms by 5.7%, having risen by 5.1% in 2003.
Budget data released just over a week ago show that the government cut CYP 129.6 mln from its expenditure in 2004.
Stock build-up a concern
One potentially worrying sign on the domestic demand side is a build-up of stocks. In mathematical terms, stockbuilding has a positive impact on real GDP growth. In fact, without a build-up of stocks, real GDP growth would have been only 2.8%.
But a build-up of stocks can also be a sign that demand is tapering off. This interpretation is underlined by quarterly GDP figures released last week, showing that real GDP growth slowed to 3.1% in the fourth quarter of 2004, compared with 4.0% in the third.
If producers draw their stocks down this year, it would have a negative impact on real GDP growth in 2005.
Exports recover, but not enough
Exports of goods and services also finally recorded an increase, after two years of decline. They rose by 3.1%, compared with a decline of 0.3% in 2003 and a painful 5.2% fall in 2002.
However, any contribution to growth from the export recovery was more than offset by a huge increase in imports: up by 8.5% year on year, compared with a decline of 0.4% in 2003.
Therefore the net contribution of the foreign balance (exports minus imports) to GDP was negative to the tune of 2.8%. Or to put it in layman’s terms, if that impact had been neutral instead of negative, GDP growth could have hit 6.5%, other things being equal.
Financial sector booms
On an output basis the fastest-growing sector was “financial intermediation”, which rose by 12.4% in real terms, having declined by 1.4% in 2003. Bumper profits recorded by two of the three big banks are a reflection of this improvement.
Financial intermediation now accounts for 6.1% of GDP–not quite the 7.0% of GDP recorded in the peak year of 2000, but higher than the 5.5% of GDP in 1998.
The second fastest growth was recorded by “private households with employed persons”, up by 11.4%, thus indicating that more and more Cypriots would rather someone else did the housework.
Transport, storage and communication also recorded healthy growth of 8.9%, thanks in part to a recovery in tourism but also a better year for the shipping sector.
According to Financial Mirror sources, the shipping sector benefited in 2004 from a number of factors: higher world trade growth generally; lower risk premiums as safety improved and companies switched from single to double hulled ships; and the indirect benefits of the scrapping of older ships in competitor countries, since the Cyprus fleet is fairly young.
Hotel sector declines again
Output in the hotel and restaurant sector saw its third consecutive year of decline, the only bright spot being that the decline of 2.8% was milder than in the previous two years.
On the other hand, wholesale and retail trade, which also partly depends on tourism, recorded a rebound, rising by 4.8% in 2004, having fallen in 2003. This could be a reflection of strong demand on the part of Cypriot residents.
Construction moderates
As indicated by the investment figures above, growth in construction moderated slightly, rising by 5.2% year on year compared with 5.3% in 2003.
However, the sector still grew faster than overall services, which rose by 4.4% according to our calculations.
Protests in recent weeks probably reflect that fact that 2004 was a tough year for farmers. Output fell by 0.5% for in agriculture and hunting, having bounced by 5.6% in 2003, and output in fishing fell by 0.6%. Agriculture accounts for only 3.4% of GDP.
Manufacturing, beset by competitiveness problems, managed to squeeze and increase of 0.3%, but actually fell as a proportion of GDP.
Fiona Mullen
