No change in Cyprus GDP, says Intercollege

Cyprus GDP in the first quarter of 2007 is not expected to show any significant change, according to the statistical model developed by the Intercollege School of Business Macroeconomic Forecasting Group.

Specifically, Cyprus GDP will reach CYP 1.88 bln (EUR 3.21 bln), at current prices, as in the first quarter of 2006. During the second quarter of 2007 GDP will amount to CYP 2.27 bln (EUR 3.88 bln), at current prices, compared to CYP 2.11 bln in the second quarter of 2006, an increase of 7.5%.

Based on the forecasts, Cyprus GDP in the first half of 2007 is expected to reach CYP 4.15 bln (EUR 7.09 bln), at current prices, compared to CYP 3.99 bln (EUR 6.82 bln) in the first half of 2006, an increase of 4%.

It should be noted that the forecast of the statistical model regarding 2006 GDP was CYP 7.98 bln (EUR 13.64 bln) which was adjusted upwards to CYP 8.17 bn (EUR 13.96 bln). According to the official report of the Cyprus Statistical Agency, Cyprus GDP in 2006 was CYP 8.36 bln (EUR 14.28 bln) and the annual rate of growth 3.8%. The model forecasted, despite estimates to the contrary, that Cyprus GDP in 2006 would exceed CYP 8 bln (EUR 13.67 bln) and the annual rate of growth of the Cyprus economy would be in the region 4%.

The upward trend in GDP is largely influenced, according to the parameters of the statistical model, by the significant increase in both the demand and production of cement, which reflects the upturn of the construction sector, the Intercollege report added.

In addition, an important exogenous factor is a general increase in consumption expenditure as a result of the fall in the international prices of oil and the increase in household disposable income. Another significant exogenous factor is the fall in interest rates towards complete harmonization in view of the adoption of the euro on January 1, 2008. There is a marked downward trend in the cost of borrowing in Cyprus pounds which is expected to equal the cost of borrowing in euros by the end of the third quarter of 2007. This fall in the cost of borrowing contributes to the increase in consumption expenditure that keeps aggregate demand, and GDP, at higher levels.

Based on the above forecasts, the fiscal deficit will be contained to under 0.5% of GDP in 2007. However, taking into account that public spending may exceed the projected level of the 2007 Budget in light of the political pressures to the government for a more generous social policy, it is quite possible that the budget deficit will end up higher than expected but, nevertheless, significantly under the 3% limit.

The above analysis continues to give 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. Until June/July 2007, when the final decision regarding the entry of Cyprus in the eurozone will be taken, no major economic developments capable of jeopardizing the smooth accession process are expected to take place, the Intercollege report concluded.