By S. Platis ECONOMIC RESEARCH: Independent Economic Research Organisation
Web Address: www.splatisecon.com
Overview: The most recent economic data point to a satisfactory growth rate for 2005, driven by increased revenue from tourism and the continued growth in the construction and retail sectors. However, high oil prices present a cause for concern, This year’s budget deficit is set to reach the government’s target of 2.9% of GDP, although rising energy prices and elections could upset the budget for 2006.
Growth: In the second quarter of 2005, GDP grew by 3.5% in real terms, on a year-on-year basis, down from 3.8% in the first quarter. Compared to the previous quarter, however, growth decelerated to 0.7% from 1.3%. While for 2005, the economy is still expected to grow by 4%, high oil prices are expected to affect growth prospects for 2006.
Tourism: Tourist arrivals grew 0.8% in July, and 10% in August on a year-on-year basis, but declined marginally at 0.2% in September. This led to a total increase of tourist arrivals of 5.9% year on year for the first nine months of 2005. Germany was the main market with the largest increase (21.6%). Arrivals from the United Kingdom, by far the largest market for Cyprus, grew by 5.4%. Revenues, however, continued to lag behind, increasing by a mere 3.1% for the same period. The effect on arrivals of the Helios Airways crash on August 14th remains to be seen.
Consumption: Consumers seem to be on a spending spree following EU entry. Retail sales volume in June increased by 6.5%, whilst for the first six months of 2005 retail recorded an increase of 7.3%. During the second quarter of 2005 pharmaceutical and cosmetics sales increased on average by 42.9%, followed by food, beverages and tobacco, which increased by 14.2% compared to the same quarter of last year. Car registrations for the period January-September came closer to those of 2003 recording a decline of 11.1%, compared to 2004, when there was a significant increase due to changes in taxation.
Manufacturing: In July, total manufacturing output fell by 2.2% year on year, probably due to the truckers’ strike in July. Exceptions to the decline are the food, beverages and tobacco industries, whose output increased on average by 5.1%, followed by transport equipment, at 2.4% (yoy). Lower output in sectors of paper works and printing, plastics industry, non-metallic minerals and machinery, led the overall declines of 3.3% in June, while in May output remained unchanged compared to May 2004.
Real Estate and Construction: House prices increased marginally by 0.1% in September compared to the previous month, while in August and July house prices declined by 1.1% and 1.0%, respectively. The first 9 months of the year accumulated to a 1.5% year-to-date house price increase, whilst September recorded a year-on-year decline of 0.4%. Overall, house prices have remained virtually unchanged since May 2004. At the same time, construction activity continues unabated, albeit it at a slower pace than in 2004. Building permits increased by 12.9% in terms of total area in the period January-June, compared to the same period last year. Cement sales were also up, by 5% year-to-date (August).
Interest rates: Following the three interest rate cuts by the Central Bank since the beginning of the year by a total of 125 basis points to 4.25%, official interest rates for the Cyprus pound remain at 125 basis points above euro-area equivalents. During the 10-year bond auction held on 28th September 2005, average yields declined to 4.22% compared to 4.84% during the previous auction on June 9th 2005.
Cyprus pound: The Cyprus pound has traded well within the 15% fluctuation band since it entered the Exchange Rate Mechanism (ERM2) on May 2nd 2005 at a rate of 0.585274 vis-à-vis the euro. Since the beginning of the year, the Cyprus pound has appreciated by 1.2%, reflecting increased capital inflows – despite recent interest rates cuts – probably as a result of lending in euro and tourist revenues, a trend probably strengthened by the weakening euro in the referenda aftermath in France and the Netherlands.
Inflation: Consumer price inflation and harmonised consumer price inflation bear the marks of the rising international oil prices. On a year-on-year basis, consumer price inflation and harmonised consumer price inflation accelerated in September to 2.9% and to 2.1% (year on year) respectively from 2.1% and 1.5% compared to the previous month. In January to September 2005, year-on-year consumer price inflation recorded 2.5% and harmonised price inflation recorded 2.1%, matching the EU25 average of the same period thus continued to remain on course for satisfying the relevant Maastricht treaty’s criterion for EMU entry. From January to August, fuel prices increased by 14.3% within the year with a weighted effect on inflation of 0.9%. The Ministry of Finance expects a further impact of 0.5% triggered by wage indexation.
External Trade & Balance of Payments: More than a year after the EU accession, trade with the 24 member states continues to increase. The value of total exports and imports increased for the period from January to August by ?79.9 million (23.3%) and by ?98 million (5.7%), respectively compared to the corresponding period last year, reaching totals of ?1,805.7 million and ?422.4 million, respectively. The balance of payments recorded a surplus of ?22 million in the second quarter this year compared to a ?239 million deficit in the previous quarter.
Fiscal deficit/surplus: The central government budget including social security finances recorded a deficit of ?46.9 million in the first seven months of 2005 (0.6% of GDP). Accounting for the seasonality in expenditure and revenues, the government appears to be well on target to reducing the budget deficit to 2.9% of GDP in 2005 (4.2% in 2004) and to reducing public debt to 68.8% of GDP. However, budget figures for 2006 are expected to be affected by the parliamentary elections as well as the slight economic slowdown due to the high oil prices.
Unemployment: In general, unemployment was kept at a satisfactory level, at around half the rate of the European average. In September, 11.5 thousand persons (3.3% of the total labour force) were registered as unemployed, lower than in August and July. Most of the unemployed have been previously employed in the wholesale and retail sale sectors as well as in the public service sector, including people with early retirement.
