Every month I take a deep dive into the Cyprus economy, looking at all kinds of indicators to explain to subscribers what is going on and what might come next.
Going as deep as possible into the statistics can alert you either to forthcoming problems, or better times ahead. For example, after a lot of rummaging around in bank financial statements in April 2011 (two years before the peak of the crisis), I wrote about the risks to the now-defunct Laiki of a 40% haircut on Greek government bonds (in the end the haircut was closer to 75% and led to the death of the bank).
Later, in August 2013, deep data-crunching made it obvious that the economy was not going to contract at double-digit rates, as many organisations, including my own, had predicted. Some of those others carried on predicting a decline of over 10% for several months.
One of my favourite geeky pursuits is to find something odd, which does not make sense at first sight, and then to keep on digging around until I finally work out what is going on.
My latest data puzzle is the performance of household consumption and retail sales. We know that the economy (real GDP) expanded year on year by a buoyant 3.3% in the first quarter of 2017. We know that tourism is heading for yet another record year and that construction is growing rapidly after a multi-year recession.
Employment is expanding across all the major sectors; unemployment is falling. Under normal circumstances, or as economists like to say, other things being equal, you would expect all of this accelerated expansion in activity to translate into faster growth of household consumption in general and retail sales in particular.
Slowing down
But this is not happening. Growth in retail sales volumes actually slowed in the first quarter of 2017 to just 2.4% year on year, from 5.9% in the fourth quarter of 2016. Similarly, growth in household consumption, which accounts for a massive 69% of GDP, slowed to 2.6% in the first quarter from 3.2% in the fourth quarter. Yet private car registrations boomed in the same quarter, rising year on year by more than 40%. What is going on?
Before delving into possible reasons why, it is worth noting that this is only one quarter’s worth of data, so it might not turn into a trend. In addition, historical data on GDP and retail statistics, unlike tourism and motor vehicle registrations for example, get revised as more information comes in. So, it might just be a blip.
But let’s assume for a moment that it is a trend. What might be behind it? If we look deeper into the retail sales statistics, we can see that the slowdown is coming from the heavily-weighted category of food. Food sales grew by just 1.1% year on year in the first quarter and actually declined in March and April. On the other hand, ‘discretionary items’, such as electrical goods and furniture (8.9%) and computer equipment and books (7.9%) bounded ahead.
Is this because people are going out to restaurants more, therefore buying less food for eating at home? Apparently not. Turnover for food and beverage services activities (which is not the same as volumes) rose year on year by a fairly healthy 3.8% in the first quarter. But this was still a slowdown compared with the 8.2% recorded in the fourth quarter of 2016.
The other reason for the deceleration, therefore, could be that certain sections of the population continue to feel the pinch from the crisis, having not had a pay rise for years, while others are out buying cars, computers and electronics.
It is a well-established statistic that, the poorer you are, the higher the share of your income goes on food. After a long period of deflation, food, petrol and electricity prices have been rising again, owing to higher oil prices, which have a heavy impact on prices in Cyprus because we still use oil products to generate electricity.
These same people are less likely to have seen a pay rise any time in the past few years. Based on data up to the fourth quarter of 2016, average earnings were still pretty much stagnant.
The dangers of inequality
This brings me to my final point, namely that we might (and it is still tentative) be seeing the beginnings of a widening of income inequality in Cyprus.
Eurostat data on income inequality show that the highest 10% of earners took more than a quarter (27.2%) of all incomes in 2015.
In 2007, they took 24.7%. The lowest 10%, meanwhile, took just 3.3% of all income in 2015, compared with 3.6% in 2007. In other words, the income gap is widening, although not yet at a rapid pace.
Similarly, the ‘at risk of poverty rate’ has also been rising, from 22.8% (before social transfers) in 2007, to 29.3% in 2015. The record is better after social transfers, but at 16.2% in 2015, it is still higher than the 15.5% recorded in 2007.
We have seen in the UK and the US, where those on the bottom rungs have seen more than a decade of stagnant real incomes, how rising inequality can lead to highly-disruptive political outcomes.
If my hunch is right, therefore, and we are seeing rising inequality in Cyprus, then we had better do something to fix it quickly, before it becomes a running sore for the political and economic stability of this country.
By Fiona Mullen, Director, Sapienta Economics Ltd