Cyprus GDP growth seen above 3%

Intercollege forecast for 3Q and 4Q

 

The Cyprus economy is expected to grow at an annual rate of 3.06%, according to a statistical model developed by the Intercollege School of Business Forecasting Group. GDP for 2006 is expected to rise to CYP 7.98 bln, at current prices, from CYP 7.74 bln last year, the survey said.

In contrast, the Ministry of Finance’s own prediction last week said the GDP growth rate for 2006 was expected to reach 3.7% due to private consumption and export of services. For 2007 the growth rate is expected to increase to 3.8% due to the additional demand for tourism and services, according to the Ministry.

The Intercollege survey added that during the third quarter is expected to reach CYP 2.05 bln in the third quarter compared to CYP 2.02 bln in the third quarter of 2005, an increase of 1.48%. Fourth quarter GDP is expected to amount to, again, CYP 2.05 bln compared to CYP 1.99 bln in the fourth quarter of 2005, an increase of 3%.

Despite forecasts for an annual growth of slightly over 3% in 2006, it is quite possible that this increase may even reach 4% as a result of favourable exogenous factors. Specifically, the rather drastic fall in the international prices of oil is expected to have a significant positive impact on the Cyprus economy. The fall in the cost of heating fuel and gasoline will boost domestic demand during the Christmas period, which will, in turn, have a positive effect on GDP during the fourth quarter.

In addition, the crisis in Lebanon during the third quarter (July and August 2006) can possibly lead to an even greater increase in GDP (mainly because of higher hotel occupancy rates) thus contributing to an overall annual increase of approximately 4%.

Based on the above forecasts, the fiscal deficit will reach 2.06% of GDP, compared to 2.4% of GDP according to the government.

However, taking into account the improvement in tax receipts – up 30% in the first six months and up 11% in VAT receipts – and the possible increase of GDP above CYP 8 bln, assuming, of course, that government spending will be restricted to the levels of the 2006 government budget, the Intercollege survey said that the budget deficit will possibly be contained to under 2% of GDP and, perhaps, even below the initial forecast of 1.9% set out in the government’s convergence plan.

The above analysis gives a strong tone of optimism regarding the prospects of the Cyprus economy and its ability to fulfill the macroeconomic criteria for the adoption of the euro on January 1, 2008. The government should pay particular attention to the level of inflation, which at present is well under control, especially until June 2007 when the final decision for the adoption of the euro will be made.