But could still achieve 3.8% for the whole year
As predicted by the Financial Mirror three months ago, the economy slowed in the second quarter, with latest figures showing that gross domestic product (GDP) rose by 3.5% in real terms compared with the same quarter of 2004, whereas it had recorded a growth rate of 3.8% in the first quarter.
Three months ago, we forecast that growth would slow from a (now donwardly revised) 3.9% to 3.4%.
On a quarter-on-quarter basis, real GDP in the second quarter rose by just 0.7%, compared with a rise of 1.3% in the first.
The slight slowdown in growth during the second quarter was probably largely the result of an early Western Easter, which was celebrated in March this year but in April last year. Year-on-year growth rates are not seasonally adjusted, so a slowdown was to be expected.
3.8% still possible for the full year
When we predicted the slowdown three months ago, we forecast a growth rate for the full year of 3.8%–slightly below the government’s official forecast of 4%. There is still reason to believe that this will be achieved.
First, the impact of the huge cut in interest rates this year: by a full percentage point in May and June, and a quarter-point cut in February, should begin to bear fruit, cutting borrowing costs for businesses and consumers alike.
Although some sectors such as construction appear to be slowing, figures to July for the all-important tourism sector suggest that we had a good summer.
We therefore expect quarter-on-quarter growth to pick up in the third quarter of the year (July-September), to around 1.1%.
Further into the year, however, big increases in oil prices will hit consumers hard when in late October or early November they realise quite how much it costs to fill the central heating petrol tank.
For that reason, we expect a slowdown in growth in the fourth quarter, to around 0.8% quarter on quarter.
However, because of official revisions to quarterly data, that is not sufficient to bring down the overall growth rate that much, so we stick by our forecast of a 3.6-4.0% growth rate for the whole of 2005, or 3.8% if you split the difference.
Although this is slower than the government’s somewhat optimistic suggestion that Cyprus’ “potential” growth rate is 4.5%, it will mark the second consecutive year of reasonably strong growth.
That, combined with signs of life at last in the long moribund stock market and impressive profits from two of the three major banks, could finally put an end to the post-bubble blues, albeit six years after the stock market peaked.
Fiona Mullen
