EIU to revise growth up in 2007, down in 2008

ECB rates on the rise

 

The Economist Intelligence Unit is expected to revise its real GDP growth forecasts for 2007 and 2008 during its July forecasting round in response to the new quarterly GDP data and changes to its forecast for eurozone interest rates, according to Financial Mirror sources.

In its forecast for June, dated May 29, the EIU noted the flash estimate from Cystat of 3.7% growth in the first quarter, but kept its growth forecast for 2007 at 3.4%, preferring to wait for the full breakdown of figures and arguing that the impact of the decline in tourism arrivals would be stronger in the latter part of the year than in the first quarter.

Since that forecast, the Statistical Service produced the full breakdown of figures, confirming a fairly strong growth rate of 3.8% (seasonally adjusted) in the first quarter. For its July forecast, due to be published late next week, the EIU is expected to revise GDP growth in 2007 up from 3.4% to 3.6% –a pace that still allows for a bigger impact on growth of tourism later in the second and third quarters.

The outlook for 2008 has dimmed somewhat, however, as the European Central Bank is now expected to raise in interest rates twice more in 2007 to 4.5% by the end of 2007 from 4.0% today.

Reasons for the revision include high capacity utilisation rates in the eurozone, a tightening labour market and firming consumer and corporate sentiment, as well as the ECB’s concerns about inflation: broad money growth remains uncomfortably high, despite recent policy tightening.

For Cyprus, that means that the Cypriot equivalent rate (now at 4.5%) will stay as it is in 2007, rather than declining slightly before Cyprus adopts the euro in January 2008.

If eurozone growth is still strong in 2008, then the ECB could raise rates further, although this is not the EIU’s current baseline forecast.

Although the EIU still expects commercial lending rates to fall, as Cypriot banks have to compete with other euro-denominated lenders, they will not fall as far as earlier expected.

In addition, it seems unlikely that the very fast pace of increase in car sales can be repeated in 2008.

The EIU is therefore expected to revise growth down in 2008 to 3.4% from the current forecast of 3.6%.