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BY SHAVASB BOHDJALIAN
The US economy added 243.000 jobs in January, the most in any month since early last year, pushing down the unemployment rate to 8.3%, a level not seen since President Barack Obama's first full month in office.
The better-than-anticipated labour picture propelled stock prices higher with the Dow ending at its best level since May 2008. The advance was led by robust hiring in the services sector even at a time when the US government is shedding jobs.
With the Fed having promised to keep interest rates at their exceptionally low level until end of 2014, the bond market continues its rally, pushing yields to record lows. The low interest rate environment has already helped stop the decline in housing and for many months we have been witnessing an improvement, albeit moderate, which bodes well for a sustained turnaround in housing, which eventually will lead to improved consumer sentiment, higher consumption and increased hiring.
The news from the US is certainly good for the rest of the world since it does not need a genius to understand that when the world’s largest economy is doing better, the improvement will eventually rub off on the rest of the world.
The question is, “how fast will this improvement come to Cyprus?” To answer that, we need to go back and check to see how long it took for the crisis which first started in the US reach Cyprus shores.
While most analysts will point the crisis starting point to 2008, in actual fact, the first trigger came back in 2006 when the US housing market turned negative and the collapse of the sub-prime loans eventually spread to the financial sector and then the rest of the economy.
In the most extreme case, it took about 5 years for the crisis from the US to reach Cyprus in 2011, so it would be safe to assume that it may well take as many years for the positive turnaround to reach here.
Such characteristics are usually for the whole of the economy and not particular sectors and specific companies which may stage a turnaround much faster than the rest of the economy.
For example, the stock market in Cyprus has been hammered and has been bleeding for over 4 years and it is safe to assume that it will be among the sectors that will record the first turnaround in Cyprus. Since the stock market is dominated by the banks however, its turnaround prospects rely to a large extent on how the banks manage to overcome the Greek crisis and their non-performing loans in Cyprus.
The tourism sector, which recorded a satisfactory year in 2011 is expected to record another 15% growth with incoming tourism numbers reaching a record high of 2,7 mln in 2012, which in turn will lead to higher foreign exchange receipts.
The services sector, led by legal firms, auditors, tax consultants and investment firms is also ideally placed to continue to record satisfactory growth, assuming that the level of service improves and prices remain competitive.
The higher education sector, medical tourism and specific manufacturing sectors such as pharmaceuticals will make their positive contribution for sure, but they are small compared to the retail and wholesale trade, which will continue to shrink as consumer confidence and consumer spending remains weak.
With unemployment numbers reaching record highs – in January 2012 the number of jobless hit 37.000 or 9.3%, and likely to continue higher, Cyprus has entered a vicious cycle of low growth coupled with cutbacks by both the public and private sectors, which will only add to the pain, leading to higher unemployment and perhaps even job losses in the banking, semi-governmental and maybe even in the government sector.
Nobody knows when and how such a process will evolve and if it will be vicious as was the case in the US, or the slow-death style of Japan. The only positive factor is that Cyprus is a small but very dynamic place and the turnaround is easy to achieve, but before that, we are likely to endure many years of pain.
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(Shavasb Bohdjalian is a certified Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10 and approved by the Cyprus Stock Exchange to act as Nominated Advisor for listings on the Emerging Market. The views expressed above are personal and do not bind the company and are subject to change without notice)
