Time for business to tighten belts?
The Statistical Service has produced its first full breakdown of real GDP growth in the second quarter, showing real GDP growth of 3.7% on the back of very strong growth of financial services, as well as tax-induced purchases of cars.
For the first six months of the year, real GDP growth was put at 3.84% over the corresponding period of 2006.
Cystat noted that the indicative indices of the performance of various economic activities during the second quarter of 2007 compared to the corresponding quarter of 2006 were as follows. Production volume index of manufacturing +2.4%, tourist arrivals -3.3%, tourism revenue (Apr-May) +3.1%, building permits in sq.m. (Apr-May) +4.2%, turnover volume index of retail trade +6.7%, turnover value index of post and telecommunications +7.9%, turnover value index of air transport index -9.7%, production volume index of electricity +2.9%, financial intermediation services +25.0%, imports of goods +8.7%, exports of goods +6.6%, registration of motor vehicles +34.4%.
But growth is slower than in Q1
The real GDP growth rate of 3.7% (or 3.8% on a seasonally adjusted basis) was slower than in the first quarter, when both measures showed real GDP growth of 4%.
According to seasonally adjusted data, the sharpest slowdown was observed in the broad area of financial services, real estate, rental and business activities.
This category slowed from growth of 7.1% year on year in the first quarter to 6.1% in the second.
A milder deceleration was also recorded for construction: down from 3.5% in Q1 to 3.1% in Q2, and hotels, restaurants and transport: down from 4.6% in Q1 to 4.2% in Q2.
Time for business to tighten belts?
While growth of 3.7% was still healthy considering the fall of tourism arrivals, it is worth noting that the main slowdown came from a sector that includes financial services.
Cypriot banks have enjoyed very healthy profits for a couple of years, not least because of booming stockmarkets at home and abroad.
Healthy profits have translated into strong growth in lending, which has benefited business.
But if the current doomsayers are right, the current correction in world stock markets will go on for some time.
This means that the equity-related profits enjoyed by Cypriot banks could be rather smaller in Q3 and Q4 than in the first half of the year.
Add to that tightening credit conditions worldwide, which will no doubt also affect Cypriot banks, and you might find that your local banker has turned a lot less generous since the summer holidays.
Depending on how long you think this is going to last, it maybe time to tighten belts just a little, while praying that the current volatility is just a correction and not a full-scale rout.
Fiona Mullen
Sapienta Economics Ltd
www.sapientaeconomics.com
