But some results are problematic
According to the latest Economic Sentiment Indicators published by the European Commission, economic sentiment in Cyprus declined on a seasonally adjusted basis for the third month in a row in June to 92.8 points, compared with a slight rise in the euro-area to 96.3 points and a decline in the EU25 to 97.0 points.
As input, the indicator uses five balances of opinions from the industrial surveys undertaken within the framework of European Commission Economic and Financial Affairs Business and Consumer Surveys.
A high level indicates that, overall, the surveys point to a healthy cyclical situation. Conversely, a low level points to an adverse business climate. A rise/fall in the indicator will point to an upswing/downswing in activity and an improvement/deterioration in the business climate.
Questions on Cyprus data
Data for Cyprus raise a number of questions, however.
The survey on consumer sentiment has been strongly negative for at least the past year, recording between minus 34 to minus 43 points. However, actual statistics show that there were strong sales of big ticket items such as cars and furniture in the past year.
Similarly, sentiment in the construction sector has been in low single figures, and recorded minus 4 in June, despite booming building permits and two 0.5% cuts in interest rates in May and June, which should boost housing demand.
Only the services sector has been consistently positive, rising from 7 in May to 19 in June.
Looking deeper into the figures may provide some explanations, however.
Within the 11 indicators that are used to calculate the consumer confidence indicator, the strongly negative components relate to the financial situation of households and savings. Questions relating to major purchases, on the other hand, were positive. In fact, purchase questions appear to have peaked at around the third quarter of 2004, more or less in line with actual sales of big ticket items such as furniture and cars.
In other words, consumers’ depression about their financial situation may be explained by the debt they have built up after the big purchases they have been making.
Within the four questions addressed to the construction industry, the most obvious change in sentiment has been with respect to prices. From 65 in July 2004, the indicator showed just 1 in June 2005. This suggests that after a rapid rise in house prices, consumers are beginning to get more choosy.
This analysis is supported by the BuySell Home Price index, which has also shown a flattening off of residential house prices this year after a rapid rise in 2004.
Fiona Mullen
