This week we saw three different forecasts for the Cyprus economy. The University of Cyprus Economics Research Centre projected real GDP growth of 2.4% in 2016; Hellenic Bank forecast 2%, while the average growth rate expected by economists polled by Bloomberg projected 1.8%. My most recent forecast is for 2%.
The one thing they all have in common is that all forecasts expect economic growth to be stronger in 2016 than in 2015, when real GDP grew by 1.6%.
Growth in the region of 2% makes sense given the strong start for tourism. Arrivals soared year on year by 32.4% in the first quarter, helped not least by a Western Easter that was celebrated in March this year but in April last year.
The real question is whether Cyprus can grow at this rate in the long term. Here, I am rather more sceptical, mainly because the country has been on a lucky run. As we all found out in 2013, luck does not last forever.
To illustrate what I mean, let us take a look at tourism. Tourism revenue accounted for just over 12% of GDP in 2015, therefore it remains one of our most important sectors.
Last year, the tourism sector benefited from an exchange rate swing. In 2015, sterling rose on average by 11% against the euro. The UK is still Cyprus’ largest market, accounting for just under 40% of the total in 2015. For British tourists, that means their holidays in Cyprus were more than 10% cheaper.
Not surprisingly, UK visitors to Cyprus rose by 19.5%, following a decline of 2.2% in 2014.
In absolute terms, UK arrivals in 2015 rose by just under 170,000. This more than offset the 112,000 decline from Russia, where a falling rouble and weakening economy hit demand.
We also saw a 29.9% increase in arrivals from euro-member Germany, thanks not least to the efforts of tourism professionals and the government to make up for the closure of Cyprus Airways. But at only 4.2% of the total, the increase from Germany was not the decisive factor.
Another reason for the general upturn in tourism was instability in other potential competitor countries such as Egypt and Turkey, as well as financial troubles in Greece.
This year, sterling has fallen back again but we seem to have got lucky elsewhere. Despite the rouble decline, the row between Turkey and Russia has seen Russian tour operators shift out of Turkey and into Cyprus. Having fallen by 17.5% in 2014, arrivals from Russia were up 56.3% in the first quarter of this year.
Even if regional instability continues, it will be hard to reach these kinds of tourism growth rates again. It is easy to post strong growth rates when the previous year was in decline. It is much harder to grow fast from a higher base.
The debt overhang
The same applies to GDP growth rates. The main reason I am sceptical about future economic growth rates, however, is the enormous debt overhang from the crisis. Corporate debt soared from 82% of GDP in 2005 to 152% of GDP in 2015.
Household debt rose in the same period from 88% to 137% of GDP.
At the same time, investment collapsed. In 2015 investment was smaller in current-price terms than in 2002 and in real terms lower than in 1995 – some 20 years ago.
No investment, very high debt and weak credit growth because of non-performing loans are not a recipe for growth and jobs. We shall need a lot more lucky breaks to keep growing at 2% in the longer term.