Mood of optimism also in big business
The government expects economic growth to exceed 4% for five years running, according to the leaked latest annual Convergence Programme submitted to the European Commission, a forecast which could be backed by business sentiment, according to Financial Mirror sources.
The report leaked to Phileleftheros last week shows the government predicting rising real GDP growth rates of 4.1% in 2005, 4.2% in 2006, 4.3% in 2007, 4.5% in 2008 and 4.6% in 2009.
This is slightly more optimistic than the forecast produced by the European Commission’s Autumn forecasts last week, which predicts growth of 4.0% in 2006 and 4.2% in 2007 on the back of strengthening growth in Europe, after an expected 3.9% in 2005.
The government’s forecasts also imply that economic growth will exceed 4% for the longest period since the post-invasion years of 1976-1980, when real GDP growth bounced back to an average 11.4% after double-digit declines in 1974-75.
The average growth rate forecast for 2005-2009 is also higher than the ten-year average of 3.7%, though lower than the 20-, 30- and 40-year averages.
Bridging the output gap
What is making the government so bullish?
Sources at the Ministry of Finance explained that the forecast is based on an assumption that the output gap in Cyprus will gradually close over the next few years.
According to government estimates, potential growth in Cyprus is around 4-4.5%, depending on net migration.
Growth in 2002-2004 reached only an average 2.6%, which created an output gap.
As the Financial Mirror has noted before, when businesses are used to an economy ticking over at around 4%, 2-3% feels like a recession, even if that the economists do not call it that.
The government therefore assumes that in the coming years the economy will exhibit above average growth rates so that by the end of the period the GDP level will be at its potential.
Big business bullish too?
Financial Mirror sources suggest that there is a mood of optimism in big business too, for a number of reasons.
First, the banks have put the bad loans of the past behind them and, especially in the case of the biggest two, Bank of Cyprus and Laiki, are now recording healthy profits.
Bank profits means they can afford to lend more to business and to spend more for promotional purposes such as advertising, with spillover effects for other businesses.
Second, big business will not be hit quite as hard by high oil prices in 2006 as in 2005, because the change in oil prices compared with this year will be small or even negative on current trends.
Finally, since Cyprus is such a small economy, any spending by big business will quickly “trickle down” to smaller business, so the impact will spread quickly.
The main factor that could undo all this optimism is the long-feared possibility that the correction of US external imbalances will be short and sharp, with a nasty impact on EU exports, rather than the gradual correction we are all hoping for.
The Economist Intelligence Unit is also predicting a sharp slowdown in UK growth in 2006. Given the importance of UK tourists to the Cyprus economy, the EIU is expected to be less bullish than locally based forecasters in its next (December) forecast report about Cyprus’ prospects.
Fiona Mullen
