University of Nicosia sees Cyprus GDP drop to €3.55 bln

Cyprus GDP in the first quarter of 2009, at current prices, is expected to drop 9.43% to €3.55 bln compared to €3.92 bln in the first quarter of 2007, according to the statistical model developed by the School of Business of the University of Nicosia Macroeconomic Forecasting Group.
Regarding the second quarter of 2009, GDP will reach €4.20 bln compared to €4.34 bln in the second quarter of 2008, a decrease of 3.22%.
Taking into account an annual inflation rate of about 2%, real economic growth during the first and second quarters of 2009 will be negative, the report said. These forecasts reflect the negative impact of the global economic crisis on the economy of Cyprus, which is becoming increasing more pronounced. Additional data and indicators for the 2008-2009 period released by the Statistical Service on March 24, whereby cement sales, private car registrations, total imports, and tourist arrivals were down 26.3%, 25.2%, 28.1% and 14.2%, respectively, tend to support the above forecasts.
The statistical model’s forecasts for the second half of 2008 (3rd and 4th quarter) were rather conservative. Specifically, the model’s forecast for the 4th quarter of 2008 was €3.97 bln while actual GDP reached €4.31 bln (a difference of €0.34 bln). The respective forecast for the 3rd quarter of 2008 was €4.10 bln with the actual GDP being slightly higher at €4.39 bln (a difference of €0.2 bln).
The main factors for this difference between actual and forecasted values were the continued credit expansion despite expectations of a slowing down; high rates of private consumption expenditure, especially during Christmas; an optimistic business and consumer climate as a result of the belief that the global crisis will not affect Cyprus; existing contracts in the construction industry continued to remain in force; the low seasonal effect of the tourist sector on GDP in the 4th quarter of the year; and the high rates of real growth in 2007 and 2008 that partially insulated the Cyprus economy from external shocks.
Based on these factors, the effects of the global economic crisis on Cyprus GDP shows a further time lag which appears to influence the forecasts for the first half of 2009.
Despite pessimistic forecasts, the lagged positive effects of real economic growth since 2007 may take the edge off the negative impacts of the global crisis, the report added.
Persistent domestic private consumption expenditures, especially in the services sector, could keep economic activity at a relatively higher level. In addition, the summer holiday choices of Cypriots could very well play an important role. A significant increase in domestic tourism is likely to partially offset the decrease in tourist arrivals and, as a result, trim down the negative effects on the economy, the report concluded.