(Updates with economist comment in fifteenth paragraph)
By Stelios Orphanides
The Cypriot economy expanded 3.4 per cent in the first quarter of the year, compared to the respective three-month period of 2016, and a seasonally adjusted 3.3 per cent, the statistical service said citing a flash estimate.
Compared to October to December, the Cypriot economy grew 0.6 per cent in the first quarter, Cystat said in a statement on its website on Tuesday.
The acceleration of growth in the first quarter was mainly on increased activity in hotels and restaurants, retail and wholesale trade, construction and manufacturing, Cystat said. Financial intermediaries saw their output drop.
The Cypriot economy grew in the first quarter of last year an annual 2.3 per cent and a quarterly 0.3 per cent. Economic growth for the entire 2016 was 2.8 per cent.
In a first reaction, President Nicos Anastasiades said that the first quarter growth figure “exceeded any optimistic forecast,” while Finance Minister Harris Georgiades said that it confirms the island’s prospects.
Anastasiades, who will probably run for re-election in February, said that he felt satisfied that the collective effort and the people’s sacrifices gradually made “full recovery” possible.
The president added that the government will continue as determined as in the past without succumbing to populism and serving expediencies, “so that we do not return to the unpleasant conditions of the past”.
“At the same time, economic growth creates the precondition for gradually but effectively tackling the problems caused to our people by the financial crisis,” said Anastasiades, who took office in March 2013, when Cyprus was forced to sign a bailout agreement which provided for the bail-in of depositors.
Georgiades said that “we are obliged to stay the course and continue in a collective effort and credible policies to recover lost ground”.
Economist Stavros Agrotis said that he is optimistic that following the announcement of the first quarter growth figure, that the Cypriot economy could expand as much as 3.6 per cent in 2017, citing a “guesstimate” adding that the upwards trend in economic activity is likely to bring more growth. “Optimism fuels entrepreneurship,” he said.
Agrotis added that tourism, which last year scored an all-time record in arrivals, and construction, with grand-scale projects either in progress or in the pipeline, will continue to fuel growth to the extent that Cyprus could face a shortage of builders.
Hoteliers are already complaining over the lack of skilled workers. The finance ministry said in April that it expects growth to accelerate to 2.9 per cent this year helping reducing the unemployment rate from 13 per cent in 2016 to 11.5 per cent this year.
The economist added that he is concerned over the sustainability of construction activity which is boosted by the government’s passport and visa schemes.
“I hope entrepreneurs are doing their homework and know what is going on in their sector so that we avoid yet another bubble,” he added.
The property bubble in the second half of the previous decade is deemed as one of the reasons which led to the 2013 banking crisis in which depositors lost around €8bn. The non-performing loans of construction companies stood in December at €3.8bn or 69 per cent of total credit to the sector.
Ioannis Tirkides, Bank of Cyprus economic research manager, said that “even though we don’t have the details of the sectoral breakdown of this growth, it can be induced that this is attributable to construction and manufacturing, two sectors that had the deepest and longest recessions dating from 2008 and thus the biggest base effects”.
“Nonetheless, construction activity may surprise again as demand increases and the available supply of unsold inventory diminishes,” causing prices to increase, he said.
“The widespread presumption regarding forecast exercises, was that the economy operates above its potential and thus growth should gravitate toward 2 per cent over the medium term,” the Bank of Cyprus economist said. “This presumption has to be revisited in view of the dynamics of specific sector activity mainly construction. For the year, I would expect a slowdown in subsequent quarters but the yearly average will most likely be higher than the 2.5 per cent that is currently forecast by the International Monetary Fund and the European Commission”.