Construction investment contracted for the first time in seven years in the second quarter while consumers carried on spending like there is no tomorrow, according to our analysis of the full figures for gross domestic product (GDP) released by the Statistical Service on Tuesday.
The topline figures confirmed the flash estimate released a week or two ago, namely that real GDP growth in the second quarter slowed to 3.9% over the year earlier, down from 4.1% in the first quarter.
Looking at GDP by expenditure, the main slowdown can be seen in investment (“gross fixed capital formation”), which slowed to 3.7% from growth of 5.5% in the first quarter.
Investment includes construction as well as capital equipment. The weakening was most pronounced in construction, where a drop of 0.8% was recorded over the same period of 2007, after a rise of 3.6% in the second quarter.
According to our analysis, the last time housing construction investment contracted was the second quarter of 2001.
Building permits have been slacking and there are now reports that house prices are falling in all areas of Cyprus except Limassol, Cyprus’s second largest city and home to the commercial port. and which is popular with oil-wealthy Russians.
Weaker construction was also reflected in gross value-added figures, showing that construction slowed to growth of 4.5%, from 5.4% in the second quarter from in the first.
However, it looks as though businesses have also begun to cut back on general investment: metal and machinery equipment investment growth slowed to 4.3% in the second quarter from 8.1% in the first, and transport investment fell by 8.7%, compared with a drop of 4.1% in the first quarter.
Slower business investment may reflect a broader downturn in the economy. Gross value-added figures showed that the broad business category of financial intermediation, real estate, rental and business activities slowed to 4.4% in the second quarter from 4.8% in the first.
Agriculture, riddled with drought, saw its 13th consecutive quarter of decline.
Consumer spends
While businesses are beginning to feel the pinch, there is no sign that the consumer has noticed, perhaps because unemployment figures are still falling and index-linked wages are keeping up spending power.
Household spending actually accelerated to 7.4% in the second quarter from 6.8% in the first. This helped the wholesale and retail trade, hotels and restaurants sector, where gross value-added was more or less steady at 3.8% in the second quarter, from 3.7% in the first.
The new government that took power after the end-February election also increased spending, with government consumption up 1% in the first quarter after a year-on-year fall (despite the elections) in the first quarter.
Slower imports have a net positive impact
Exports of goods and services showed a puzzlingly strong increase in the second quarter, of 11.1%, after a drop of 0.6% in the first. Tourism and exports of goods have not been buoyant enough to provide the full explanation, therefore the main reason must be exports of business services.
Weaker investment has meant slower import growth, which recorded single-digit growth for the first time in a year of 8.3%. Slower import growth had a net positive impact on growth of 1%. In other words, if the effect had been neutral, then real GDP growth would have been only 2.9%.
Fiona Mullen
www.sapientaeconomics.com
