12 Jan 2016 Is economic growth in Cyprus an illusion?

According to the latest flash estimate from the Statistical Service, Cystat, the Cyprus economy is growing again. Real GDP growth in Cyprus expanded over the year earlier by a seasonally adjusted 2.2% in the third quarter—its fastest pace of growth for five years.

It was also the third consecutive period of quarter-on-quarter growth. The economy grew in real terms by a seasonally-adjusted 0.5% over the previous quarter.

Two consecutive quarters of decline mean recession, therefore three straight quarters of growth mean the economy is well out of the quagmire.


Real versus nominal

However, the key word to focus on here is “real”.

In normal times, if your economy expands in absolute (nominal) terms by 2.5% and your inflation rate is 1.5%, then your real growth rate is going to be roughly the difference between the two, namely 1%.  The reverse is also the case. If your economy expands by 2% and prices fall by 3%, then, in nominal terms, your economy contracted by roughly 2% minus 3%, which is 1%.

Let’s take a look at recent inflation rates to see if the Cyprus economy is expanding or not.

In Cyprus, the EU-harmonised consumer price index dropped in the third quarter by 2.1% compared with the same period of the previous year. The EU-harmonised rate is the one used for national accounts (GDP) purposes.

As mentioned above, real GDP rose by 2.2% in the same period.

We are not going to have the full national accounts data until later this month. But if the deflation rate was almost the same as the real GDP growth rate, then it is likely to mean that, in nominal terms, the economy did not really expand at all in the third quarter.

In addition, if the population remained the same (Cyprus has experienced emigration lately, so this is not a given), then average per capita incomes will not have budged either.


Running faster to stand still

Growth in real terms still means that economy activity is increasing. You can see this from retail sales. The volume of retail sales rose by 3.6% year-on-year in the third quarter, even while the value fell by 1.6%. So more televisions, iPads and the like are being sold, but they are being sold at lower prices than before.

Lower prices have two effects. On the one hand, they increase disposable income. Just compare your electricity bill with what it was in 2011 and you know what I mean.

But lower prices also mean lower company profits, which in turn influence the amount companies are prepared to pay their staff.

This might explain why so many non-economist friends tell me they don’t believe we are out of recession yet.

Economists get excited about growth because we think that it means things are getting better. But for individuals, even if the money in your pocket goes further, it still feels like you are running faster just to stay still.