Cyprus GDP could drop between 7% to 14%, in an extreme scenario, according to two senior economists at the University of Cyprus who have published a position paper arguing extensive research based on real-time data is necessary to give out the right projections about the economy.
They argue that with no tourist arrivals expected at least through to June, the annual impact on the tourism sector could be annual losses of between 20% and 80% and suggest issuing ‘innovative’ indicators based on weekly data.
“International organisations, such as the Federal Reserve Board of the U.S., acknowledge that in such an unprecedented event, the historical data does not contain relevant information about extreme phenomena that could help in the projection of current conditions,” wrote UCy professor Elena Andreou, head of the Economic Research Centre, and economist George Syrichas, former executive member of the Central Bank of Cyprus.
“In the current environment of great uncertainty, and the conditions fluctuating drastically, it is highly doubtful the techniques and methods which rely on monthly and quarterly historical data, which are often published with great delay, are in a position to capture the rapid fluctuating conditions in time,” the two economists added.
Andreou and Syrichas said the coronavirus pandemic “has created an unprecedented uncertain economic environment where stakeholders are called to continue their work and make the appropriate economic decisions.
“The state must urgently assess its current and future fiscal requirements and plan the respective financing.
The banks and the rest of the financial sector are trying, through stress tests, to trace the margins to absorb losses. In general, the economy’s stakeholders must base their current and future decisions on some projection rate on the development of the pandemic and the economic conditions.”
The economists said that to conclude their projections they resorted to employing different and complementary methods that place emphasis on recent high-frequency data.
They said they used the ERC’s ‘composite leading’ and ‘composite coincident’ indices, as well as surveys on the GDP’s future path, based on output and spending.
Using local and international indices on economic activity, weekly and monthly financial indices, as well as data from the business and consumer confidence surveys, they went for two scenarios.
“The first projects an annual GDP reduction of 7% and a second, relatively extreme, scenario with a reduction of 14% in 2020.”
They said that in both scenarios, they utilised available data for March and April, as well as expectations in various sectors in Cyprus and Europe over the next three to 12 months.
They also concluded that there would be no tourist arrivals up to June, while for the second half of the year they reviewed other parameters as well, including an annual reduction of tourism by 20% to 80%.
“What is important here is not the scenarios as such, but the real-time monitoring and forecasting of economic activity.
“In addition, the new environment implies that we should be innovative and produce information on a weekly frequency, as well as the establishment of an uncertainty index similar to other international organisations and countries,” the two economists argued.