Government props up Cyprus growth

Full national accounts data for the fourth quarter show that Cyprus recorded a respectable real GDP growth rate of 3.7% in 2008.
However, growth in the last two quarters was propped up by a government spending as household consumption and investment slowed sharply.
The GDP growth rate in the fourth quarter of 2008 slowed to 2.9% over with the same period of 2007 (seasonally adjusted), having risen by 3.5% in the third quarter.
The fastest decline was seen in household consumption, which accounts for two-thirds of GDP. Although spending still rose, the growth rate fell to 2.9% in the fourth quarter, from 7.5% in the third.
The growth rate of gross fixed capital formation, which includes investment in construction, fell to 6.0% from 10.2% in the third quarter.
The downturn in demand is reflected in imports, which actually fell by 3.8% in real terms over the same period of 2007, having risen by a rapid 17.5% in the previous quarter.
Thus an important reason why growth did not slow further was government consumption, which grew by 16.1% in the fourth quarter, having already risen by 15.4% in the third.

All sectors slow down
The breakdown by sector shows a slowdown in all categories except agriculture, which merely managed to decline by less than in the third quarter.
Given the acceleration in government consumption, it is not clear why the category of public services showed a slowdown in the fourth quarter.
Perhaps government consumption has been focused elsewhere, for example on services related to public infrastructure works (infrastructure itself would show up in gross fixed capital formation).
Financial services have evidently experienced a slowdown, growing by 4.1% over the year earlier in the fourth quarter compared with 4.5% in the third.
However, this is a fairly mild slowdown compared with other countries across the globe and reflects the banking system’s comparatively healthy liquidity position.

Fiona Mullen
www.sapientaeconomics.com