27 May 2017 Is 3.3% Cyprus growth sustainable?

Real GDP growth in Cyprus grew on a seasonally adjusted basis by 3.3% year on year in the first quarter of 2017, according to the latest ‘flash’ estimate from the Statistical Service, Cystat.

The last time Cyprus enjoyed year-on-year growth rates this high was the third quarter of 2008, when real GDP grew by 4% (according to the most recently revised Cystat data). This was just before the economy fell into its first recession in over 30 years and eventually a nasty banking crisis.

In the third quarter of 2008, growth was essentially being spurred by debt. Private consumption grew by 9.4% (leading to a build-up of household debt), while government consumption grew by a massive 20.5%.

Yes the seeds of decline were already evident. Exports of goods and services fell year on year by 4.4% in the third quarter of 2008, as tourism arrivals shrank by 3.2%. Investment in housing construction had also already been hit.

It fell year on year by 0.4%, just before a double-digit decline that lasted five years.

Can we say that this time is different? We shall not know all the reasons for the 3.3% growth rate in the first quarter of 2017 until the full details of the national accounts are published next month.

However, what we do know is that tourism arrivals rose by 13.5% year on year in the first quarter and property sales rose by 10.1%. Strong growth in building permits for dwellings during January-February also suggests (but does not necessarily guarantee) that construction demand remains robust.

We also know that the government is still keeping a tight hold on spending. Government expenditure rose by just €3 million year on year in the first quarter, thanks primarily to a reduction of subsidies.

Yet I am still not sure that we shall see a growth rate of 3.3% for the full year. Inflation is picking up as oil prices push up electricity costs, and this will eat into disposable incomes.

Tourism arrivals from the UK, which is still the largest market, have been a little uneven, falling by 7.9% in March but rising by 16.3% in April. This may be related to the fact that ‘Latin’ Easter was celebrated in April this year but March last year.

However, sterling is still 12% lower than it was just before the Brexit vote a year ago, therefore I am still worried about the impact of a weaker currency on last-minute bookings.
Finally, there is the maths.

To reach 3.3% for the whole year, the quarterly growth rates would have to average 0.9% for the rest of the year. Yet in the first quarter of 2017, quarter-on-quarter real GDP growth slowed to a seasonally adjusted 0.6%, from 0.7% in the previous two quarters.

Quarterly GDP growth rates are revised up and down a lot as new data come in, so these statistics are not set in stone. However, based on the data published to date, a 3.3% growth rate for the full year seems unlikely.