All forecasts are dated 14 June 2012
Economic conditions will continue to be very challenging in 2012, according to all of the panellists on the quarterly Financial Mirror Consensus Forecast, while there are mixed views about whether we can recover by 2013.
The panel, launched not long after the Mari explosion when there was widespread confusion about its impact, comprises respected economists from the private sector and academia. Every quarter, panellists give their opinions about which way the economy is heading and why.
This quarter, we welcome a newcomer, Symeon Matsis, a well known and respected private sector economist.
According to latest official figures, in the first quarter of 2012 there was a seasonally adjusted decline in real GDP of 1.5% over the same period of the previous year.
Three panellists thought that the full-year decline for 2012 would be less steep than this, three thought it would be around the same, and two thought it would be worse.
The net result is that the average of the panellists’ forecasts comes in at a decline of 1.5% for 2012.
All the panellists worry about the impact of the long-running Greek crisis on confidence. Given the uncertainty about how this will play out, it is perhaps not surprising that the forecasts for 2013 are rather more diverse.
Three optimists expect that there will be growth in the economy next year. Two pessimists expect another year of decline. But a greater number expect stagnation or near stagnation in 2013.
The net result is that the average of the panellists’ forecasts is for stagnation (0%) in 2013.
The escalation of the Greek crisis means that the consensus forecast is considerably more pessimistic than in March, last quarter, when the average expected decline in 2012 was 0.4% (now 1.5%) and the expected growth rate for 2013 was 0.8% (now 0%).
Risks are mainly on the downside
Maria Zambarloukou
Group Economic Research Division, Bank of Cyprus
The downturn of the Cyprus economy, which had fallen back into recession in the second half of 2011 following the explosion at Mari, has intensified during the first months of 2012 (with real GDP declining by -1.6% on an annual basis during the first quarter).
A deteriorating economic outlook in the Eurozone, the escalation of the European debt crisis, the consecutive downgrades of the Cyprus economy, the haircut of Greek government bonds and its impact on the domestic banking system have adversely affected consumer and investor confidence.
Further to this, the measures adopted to harness fiscal finances, declining company profitability and personal incomes as well as rising unemployment contributed to the reduction in domestic demand. Moreover, the imminent possibility of Cyprus seeking assistance from the European Stability Mechanism (or the EFSF) and adopting additional austerity measures have created further uncertainty.
These trends are set to continue during the second half of 2012 even though in the meantime it should become clear what form of external assistance Cyprus will seek. On the other hand, the impact of the Mari explosion on economic growth will be minimized, while the high tourist season will set in. As a result, the economy is projected to exhibit negative economic growth of about -1.2% during 2012.
As regards 2013, economic activity is expected to remain subdued and real GDP growth to be marginal, at around 0.5%. Risks to the outlook are mainly on the downside due to the uncertainties regarding political and economic developments in Greece, as well as the future of the Eurozone, due to fears that the European debt crisis could escalate further.
Government adding to nervousness
Symeon Matsis
Private sector economist
Short term developments are very disappointing and the latest quarterly data confirm the downward spiral of the economy and the double dip recession. At the same time the refusal by the government to act on public expenditures, the simmering troubles of the banks and the uncertainty about Greece, are adding to the nervousness of the business community. Hence, the real question is when this downward trend will hit bottom. In addition we are seeing that many EU countries have also entered recessions, leading to substantial deterioration of the external economic environment.
The strong declining trends by some of the major short term indicators such as purchasers of private motor cars, construction activity, manufacturing and the economic sentiment index are all being strongly captured by the inexorable rise of the unemployment rate and the large continuing current account deficit. At the same time the reluctance to deal with the structural competitiveness problems such as the level of productivity, cost of living allowance, fiscal deficit and pensions, means that development prospects are deteriorating.
Hence, the downward revision of Ministry of Finance and Central Bank forecasts for GDP in 2012. Hence my own forecasts, based on the strong negative trends and the deteriorating external environment, is that the negative rate of growth will be 1.6% and unemployment 10.3%. Given the relative decline of the Euro against the dollar, inflation will accelerate to 3.8%. The continuing rise in public sector employment and the high cost of the EU presidency will add to the fiscal imbalance leading to a deficit of 4.5% of GDP, which together with the cost of the bailout for Laiki bank will push public debt to over 80% of GDP precipitating the bailout. In 2013, I expect the economy to stagnate with further rise in unemployment.
June is proving to be critical
George Theocharides
Associate Professor of Finance, Cyprus International Institute of Management (CIIM)
In the first quarter of 2012 we have witnessed another period of negative growth, continuing the trend from the last two quarters of 2012. Specifically, the country’s GDP has shrunk once more by 0.4% against the previous quarter and 1.6% against the same quarter of last year (not seasonally adjusted). The negative growth was mainly an outcome of sectors such as construction, manufacturing, and electricity while banking and services, despite the recession, produced positive growth rates.
Reasons for the negative growth rates can be decomposed to internal as well as external causes. On the internal front, the uncertainty regarding the recapitalisation efforts by our banks (until the government intervened to underwrite €1.8 billion for Laiki Bank) as well as the unnecessary delay by the government officials to take drastic measures that would tackle the fiscal imbalances and promote growth, have both contributed to the negative trend. On the external front, the uncertainty surrounding Greece and the inability of the Greek politicians to create a government that is willing to stay in the euro and continue with the necessary reforms, as well as the mounting debt problems faced by a number of Euro member states have exacerbated the situation.
The current month is proving to be very critical as we have the elections in Greece that would determine whether Greece remains in the Eurozone or not. At the same time, our government needs to find the necessary loan needed for the recapitalisation of our banks (whether it will be a loan from a third party or directly from the European financial stability mechanisms) and to cover its mounting expenses. Furthermore, liquidity in the market has completely dried up and that hinders any prospects for growth, while public’s confidence has eroded. I see this negative trend continuing for the next quarter as well thus my estimates for growth have to be revised downwards to -1.5% for 2012 with zero growth for 2013.
This government's actions will be crucial
Alex Apostolides
Economic Historian, European University of Cyprus
In the UK government there is a real concern about the possibility of a “double dip” recession; here the new 2012 Q1 estimate of -1.6% (seasonally adjusted) has confirmed that that Cyprus is experiencing a “double dip”, yet still there is no great sense of urgency from government circles. Let’s get something straight: some of us have been shouting since 2009/2010 for the government to take action against the oncoming storm of Greek market exposure, government fiscal deficit and its effects on the market, the credit squeeze to business. Fast forward to 2012 and not much has been done; as a result, the European Commission’s suggestions for Cyprus are quite similar to those of last year. It is almost certain that the recent relaxation of expenditure by parliament and the increasingly poor economic climate have pushed the government off its budgetary targets.
As a result the measures we need to take in 2012 and 2013 will be draconian – hence the deterioration of the economic forecast. One would expect that the weak euro against the rouble and the pound would aid tourism, but the first results of the summer are disappointing even for the tourism sector.
The government needs to act and restore credibility soon or else their inaction will be remembered for the rows of unemployed it created which has been unprecedented during peacetime. Rational expectations suggest that the uncertainty over the upcoming measures has been undermining business confidence, especially since the government assured business that no other measures were coming, damaging all sectors of the economy. The above predictions could be avoided if we finally see in 2012 a credible long term plan to solve the interlinked problems facing Cyprus.
Significant challenges ahead
Michalis Florentiades
Economic Studies, Hellenic Bank Public Company Limited
Overall 2012 is expected to see recessionary conditions with the economy facing significant challenges. Still, GDP growth is expected to contract slightly less than the 1.9% pace of 2009, which marked the year following the global financial crisis of 2008. GDP will likely contract by 1.5% for 2012 and by a lesser 0.5% negative pace during 2013. The risks to both forecasts are unfortunately on the downside since there is a risk of disruptions in terms of further turbulence in the Eurozone debt crisis, which could in turn negatively impact the global economy. On the other hand, an implementation of necessary structural and fiscal reforms, together with comprehensive steps on a pan-European level to arrest the Eurozone debt crisis and a more stable global economy, could gradually stabilise the situation in Cyprus, boost confidence and lead to a recovery in the medium term.
Domestic consumption will likely contract but hopefully not much more dramatically than the 0.7% pace that retail sales by volume fell during the first quarter of 2012. In the secondary sector on the other hand, industrial production and manufacturing are registering particularly steep double-digit declines slightly in excess of 10%. Construction activity is also contracting at an unusually sharp pace on top of previous years’ declines, as suggested by the annual 34.5% drop in local cement sales by volume for the January-May period.
The “Other Services” sector provided a positive boost during the first quarter and hopefully the sector’s moderately good performance will be maintained during the remainder of the year. Other positives include the 12.5% annual drop in the goods’ trade deficit during the first four months of the year due to a drop in imports. The recent (relative) drop in fuel prices will also provide a small but much-needed boost to the consumer. Tourism–initially expected to be one of the positive performers for 2012–posted disappointing figures so far but information from the important summer months should be awaited before drawing further conclusions.
Need for growth and investment measures
Marios Christou
Dept of Economics and Finance, University of Nicosia
The Cyprus GDP forecast for the next quarters as well as for the whole of 2012 are subject to various factors and parameters within a very fragile environment.
If we assume that the Greek elections produce a “solid and stable” possibly coalition government for Greece stabilising at least for the short run the environment, the Cyprus GDP will continue its negative growth rate. I would adjust my previous forecasts downwards for the three last quarters of 2012 expecting a growth of -1.0% for the 2nd quarter, -0.4% for the 3rd quarter and -0.8% for the 4th quarter with an overall annual growth of -0.7% for 2012.
Based on the same assumptions I would expect the 2013 GDP to be still negative at around minus 0.3% with the economy moving out of recession in the 3rd quarter of 2013.
If an unfortunate Greek collapse happens with “Grexit” from the euro area, there will be a severe negative impact on the Cyprus economy. In this case several scenarios could prevail with the Cyprus economy under any circumstances to suffer a heavy GDP negative growth.
I would not be surprised if the GDP growth adjusts to up to -5% in the 3nd quarter, recovering to -3% in the 4th quarter. The overall annual growth for 2012 is then forecasted at approximately -2.4%.
In the next few days and certainly before the end of the current month the situation will be clearer. I believe that it is important that if any government measures are to be taken these have to be geared towards providing incentives for investments and growth rather than any further tax increases of any form. In addition, I believe that any additional bilateral loan agreement will deteriorate rather than improve the current economic conditions.
EU financial assistance will be critical
Yiannis Tirkides
Economic Research, Laiki Bank
Cypriot domestic banks with an outsized exposure to the Greek economy are taking considerable stress, having to mark down the value of their Greek bond holdings and also loans to households and businesses. More importantly, however, the likelihood of a Greek euro exit, regardless if it materialises or not, at least for this year, is exacting a heavy toll both on the country and the banks.
There are heightened liquidity and solvency risks that need to be addressed. In this context banks are too cautious, tightening thus credit to the domestic economy to the point of a crunch almost! Net lending hence is dropping to households and businesses in the resident sector, albeit marginally, and the real economy is contracting.
Further developments in Greece will certainly bear significantly on further developments in the Cyprus economy. And also, the extent and conditions of financial assistance from Europe’s stabilisation mechanisms will be critical in providing systemic support to the domestic banking sector.
Cyprus needs to apply for financial assistance to the European financial stability mechanism even if that would mean a full adjustment programme, not just for the banking sector. This would provide a much needed guarantee regarding the efficacy of the banking system on which growth depends.
But for now it is difficult to anticipate that growth will return positive in the second half of the year. The recession will most likely continue longer than initially anticipated with real GDP contracting by about 1.2%. But we still expect GDP to grow in 2013 by 1% to 1.5%.
Greek crisis will continue to drag
Fiona Mullen
Director, Sapienta Economics Ltd
I have sharply revised down my forecast for this year and next. This is not only because of the Q1 figures showing a seasonally adjusted decline of 1.5%. It is also because I believe that the Greek crisis will continue to a negative impact on demand until the end of the year, regardless of who forms a government in Greece.
While it is true that Cypriot business and financial services continued to perform well in Q1 and the banks even managed to scrape a small profit, I suspect that the past three months were rather more difficult for these normally dynamic sectors than the six months that preceded them.
Therefore, I expect a slowdown in business and financial sectors to be accompanied by a steeper decline in the retail sector as soaring unemployment eats into demand.
This will also affect the construction sector, which is already held back by oversupply, company debts and banks’ unwilling to lend. Construction is unlikely to pick up any time soon.
In addition, we have seen that investment has halted in all sectors of the economy, not just construction. Lack of investment today will act as a drag on growth in future.
The strong sterling and rouble could translate into more tourists this summer. But I fear that this will be offset by the negative impact on demand of Cyprus entering the European support mechanism. At the time of writing the only one left in denial that this was inevitable was the government.
The arithmetic means that even if we see modest quarter-on-quarter growth in 2013, it will not translate into a positive growth rate for the whole year. I therefore expect a real GDP decline of 2% in 2012 and zero growth in 2013.
