By Alexander Apostolides on November 16, 2011

Forecasts of the Cypriot Economy: Estimate still on Track

Back in the 14th September, I was asked to estimate the GDP of 2011 and 2012 for Cyprus. I was reluctant to do so since I do not consider myself a forecaster, nor do I have a formal model of the Cyprus Economy that is forward looking.

I do however understand national accounts and how they work, and having recently looked at estimates and with help of others revised the Mari disaster, I applied this knowledge to GDP. Yesterday the Government of Cyprus has released the latest quarterly estimates being negative at -0.6. So up to now total growth of GDP is just 0.7%.

I am aware that this is a flash estimate and I am sure once the additional cost of more expensive electricity gets updated the value added will drop and the GDP fall will be even larger (-0.1%/-0.2%)

Unlike the third quarter, which was considered universally poor from most available indicators and anecdotal evidence, there is a less clear picture for the fourth quarter. The SMEs in the construction sector and support services to construction seem to be recovering. Consumers are upgrading and repairing existing houses and cars rather than spending for new ones, providing substantial work for several repair and SME services such as plumbing, carpeting etc. One is unsure how much of such business is actually recorded since it is largely done in the shadow economy to avoid paying VAT.

At the same time the news from the most dynamic contributors of economic growth, such as the banking and the construction of housing are suffering. The need for the financial services sector to raise capital and prepare for exposures to Greece, and perhaps additional losses due collateral damage of the current turbulence of the markets (see the exposure to the receivership of MF Global) will reduce income generation.

I stand by my original predictions of September: Negative growth in 2011 (-0.1%), weak recovery in 2012 (0.8%) and negative per capita growth for both years. Any one willing to bet on a different number?

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