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Home Publications Articles

Cyprus government pumps up economy in Q1—analysis

February 9, 2009
in Articles
Reading Time: 2 mins read

Has the banking sector been profiteering?
The full breakdown of national accounts for the first quarter of 2009 published on Monday confirmed the “flash estimate” released in May, which showed that the economy stagnated in the early months of the year.

The real GDP growth rate in the first quarter was reported at 0% (seasonally adjusted) compared with the previous quarter. Cyprus has therefore so far avoided recession, which is technically defined as two consecutive quarters of quarter-on-quarter decline.

Compared with the same quarter of the previous year, real GDP growth rose by 1.5% (seasonally adjusted) or 1.2% (not seasonally adjusted).These were both slightly lower than the growth rates reported in the flash estimate (1.6% and 1.4% respectively).

 

Government spending up by 12.2%
In what has now become a pattern, government spending was an important reason why growth did not contract. “General government consumption”, which accounts for one-fifth of all GDP, rose by 12.2% year on year in the first quarter, having risen by 6.3% (revised) in the fourth quarter.

By contrast, private consumption, which accounts for 70% of GDP, slowed sharply, to just 2.7% in the first quarter, having risen by 9.8% in the same period of 2008. Other data show that retail spending has slowed and car sales have dropped.

This slowdown in consumer spending was also reflected in imports of goods and services, which tumbled by 19.6%. Exports of goods and services, dragged down by poor tourism results, fell by 12.8%.

Gross fixed capital formation slowed but did not decline, thanks to a 10.5% increase in metal and machinery equipment investment, which might reflect businesses taking advantage of a weak sterling or dollar to make purchases.

There was also 9% increase in non-construction investment (mainly public projects), compared with a 2% decline for housing construction investment.

On a sectoral basis, the main sectors to be affected were industry including manufacturing (down 2.4%) and the broad sector that encompasses retail and wholesale trade as well as transport, which fell by 1.1%.

Construction growth slowed to 3.4%, presumably as a result of the abovementioned fall in housing investment.

On the other hand, the sector that includes banking—financial intermediation, real estate, rental and business activities—did rather better than might be expected, rising by 4.5%. The Statistical Service noted that there was a positive performance from financial intermediation (banking). This might lead some to believe that the banking sector has been profiteering from the downturn, by keeping lending rates high while reducing deposit rates.

If so, it would help explain why the finance minister, Charilaos Stavrakis, has been badgering the banks to drop lending rates in this difficult economic environment.

Fiona Mullen
www.sapientaeconomics.com
June 11, 2009 – www.financialmirror.com

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