Economic Perspectives : 2012 · trade Dom. interest rates CSE indices Int. econ. activity Int. stock markets Int. interest rates Exchange rates Foreign CPIs Int. commodity pr. EU

Economic Perspectives: 2012

Council of Experts ERC1

Plan of presentation

� Conclusions of Council of Experts

� World Economy

� Cyprus Economy: Latest figures

� Econometric Results

� Risks� Risks

� Conclusions


Conclusions of Council of Experts


Council of Experts of the Economics

Research Centre

� The Council� Dr Marios Clerides, President Cyprus Econ. Society and

Hellenic Bank

� Professor Panos Pashardes, Director Economics Research Centre

� Professor Pissarides, University of Cyprus and LSE


� Dr. Michael Sarris, Former Minister of Finance

� Professor Louis Christofides, University of Cyprus

� Secretary General� Dr Zenon Kontolemis

� Research Director� Dr. Nicoletta Pashourtidou

Risks for the economy 2012

� Negative

� Worsening situation in Greece

� Worsening of external environment

� Lower disposable income, impact on private consumption; this can be offset by confidence boost from fiscal consolidation process


process

� Adjustment of savings by households and businesses

� Lower credit, impact on private consumption and investment

� Positive

� Confidence boost from improving fiscal outlook, and prospects of natural gas extraction,

� Continued strong performance of tourism

Key Forecasts

� GDP – 1½ to -2 for 2012

� -2½ to -3% in first half

� -1½ to -2% in second half -4

-3

-2

-1

0

1

2

3

4

5

6


second half

� Considerable uncertainty

-5

-4

2008I

2008II

2008III

2008IV

2009I

2009II

2009III

2009IV

2010I

2010II

2010III

2010IV

2011I

2011II

2011III

2011IV

2012I

2012II

2012III

90% 70% 50% Mode forecast Published data

Key Forecasts

� Inflation 2 -2½ for 2012, excl. tax hikes

� Increase in VAT could add around ½ pp in 2012

-1

0

1

2

3

4

5

6


-2

-1

2008I

2008II

2008III

2008IV

2009I

2009II

2009III

2009IV

2010I

2010II

2010III

2010IV

2011I

2011II

2011III

2011IV

2012I

2012II

2012III

50% 70% 90% Mode forecast Published data

Forecasts heavily conditional on policies

� The right policies can help minimise GDP fall

� Structural reforms: public sector, labour markets, improvements of institutions, policies to ensure financial stability, continued fiscal vigilance and fiscal structural reforms

� On-going reform process: Reforms must not be undertaken on the eve of deadlines


undertaken on the eve of deadlines

� Government needs to be prepared for higher deficit in 2012

Report on the economy of Cyprus and

prospects for 2012 by the Economics

Research Centre


World Economy: significant revisions of

growth for 2012 by IMF

TableTableTableTable 1111: : : : IMF and European Commission ForecastsIMF and European Commission ForecastsIMF and European Commission ForecastsIMF and European Commission Forecasts

IMFIMFIMFIMF1111 European CommissionEuropean CommissionEuropean CommissionEuropean Commission2222

2011201120112011 2012012012012222 2011201120112011 2012201220122012

USAUSAUSAUSA 1,5 1,8 1,6 1,5

Euro areaEuro areaEuro areaEuro area 1,6 -0,5 1,5 0,5


Euro areaEuro areaEuro areaEuro area 1,6 -0,5 1,5 0,5

GermanyGermanyGermanyGermany 2,7 0,3 2,9 0,8

FranceFranceFranceFrance 1,7 0,2 1,6 0,6

ItalyItalyItalyItaly 0,6 -2,2 0,5 0,1

GreeceGreeceGreeceGreece -5,0 -5,5 -2,8

U.K.U.K.U.K.U.K. 1,1 0,6 0,7 0,6

RussiaRussiaRussiaRussia 4,3 3,3 3,9 3,8

JapanJapanJapanJapan -0,5 1,7 -0,4 1,8

ChinaChinaChinaChina 9,5 8,2 9,2 8,6

Sources: International Monetary Fund, European Commission

1 World Economic Outlook Update – January 2012

2 European Economic Forecast – Autumn 2011

Interest Rates expected to remain low at

least throughout 2012…


World Economy

� Deceleration of world growth; important differences across countries� Good performance in US, China, Germany� Laggers: Spain, UK, France, Italy

� In Germany and US, visible signs of sustainable recovery; improvement in labour market

� Sovereign debt crisis in euro zone


� Sovereign debt crisis in euro zone� UK not recovering, unemployment rising� Supporting monetary policy; recent LTRO action by ECB

fuelled market rally, may have put a backstop on bank share slide

� Inflation steady, significantly lower risks� Uncertainty in short and medium-term; potential growth

rates appreciably lower compared to 5 years ago

Cyprus Economy: Recent figures


GDP 2011

2010 2011 2011

annual quarter total1st 2nd 3rd

GDP 1,1 1,5 1,3 -0,5 0,7

Public consumption 0,6 -6,0 -2,7 1,2 -2,6

Private consumption 2,4 3,8 0,8 -0,5 1,3

Gross fixed cap. Formation -3,3 7,6 -6,1 -15,4 -4,8

Exports 6,1 2,6 7,1 5,8 5,2

Imports 5,1 5,3 1,0 -1,0 1,8


Imports

4th quarter 2011 flash-0,5%

Annual estimate 2011+0,5%

4th quarter GDP in EU


Cyprus stands as an outlier, in that is the only country that displays acceleration of growth in Q4; could be due to Mari events in Q4 (?)

Economic Sentiment and GDP


Private consumption flat ... use of credit

cards is on the rise…


Slowdown of credit growth, and decline in

deposits…


Construction still struggling, double-dip

emerging…


Imports and exports are decelerating…


Improvement in tourism arrivals… but is it

sustainable?


Expectations in services have retreated…


…and trade statistics reveal slowing

economic activity


Labour market exhibits significant

worsening


Wage growth has diminished, inflation

around 2½-3% in past months


Overall picture based on recent indicators

� Slowdown in private consumption growth, no yet sign of a sustained fall in level; available credit and deposits must be helping, but for how long?

� Significant and continued decline of investment

� Natural gas discovery may boost confidence, but not yet related investment

� Some positive impact from investments into damaged power plant (imports?)

� Going forward, credit growth and interest rates will be crucial for consumption


� Going forward, credit growth and interest rates will be crucial for consumption and investment

� Trade (a slowdown is visible)

� Relatively good performance of tourism and financial intermediation

� Lagging other services and transport

� Import slowdown is clearly visible for consumer goods, intermediate and capital goods

� Labour market deterioration pose a great challenge

� Increase of unemployment, fall no. of vacancies

Monthly GDP Index (CY COIN)

� Estimation in real time of GDP growth, excluding short-term fluctuations ≈ -1% for 2011Q4 and 2012Q1

1

2

3

4

5

6

7

� Based on CEPRs Euro coin concept


-4

-3

-2

-1

0

1

12-02

05-03

10-03

03-04

08-04

01-05

06-05

11-05

04-06

09-06

02-07

07-07

12-07

05-08

10-08

03-09

08-09

01-10

06-10

11-10

04-11

09-11

GDP growth (y-o-y) Monthly GDP Index

Econometric Forecasts

� Year-on-year growth (quarterly)

• Real GDP (1995Ι-2011ΙΙΙ)

• CPI (1999I-2011III)

� Forecast horizon: 4 quarter ahead

� Around 200 time series utilised (domestic and � Around 200 time series utilised (domestic and

foreign)

� Methodology

• Factor models (e.g. Stock & Watson 2002)

• Combinations of forecasts (e.g. Stock & Watson 2004)


Econometric Forecasts - GDP

Smoothed histogram of all forecasts per quarter from Factor-Augmented ADL models that outperform the random walk

.4.6

.81

2011IV

.2.3

.4

2012I

Mean

Mode

0.2

.4

-4 -3 -2 -1 0 1

0.1

-6 -4 -2 0 2

0.1

.2.3

.4.5

-6 -4 -2 0 2 4

2012II

0.1

.2.3

.4

-10 -5 0 5

2012III



Estimates for the growth of GDP based on the distribution of a large cross section of individual Factor-Augmented ADL models

2011IV 2012I 2012II 2012III

Mode -1,5 -2,8 -2,9 -1,4Mode -1,5 -2,8 -2,9 -1,4

Mean -1,5 -2,2 -2,4 -0,9

Standard deviation 0,45 1,08 1,21 1,73

Forecast band(± 1 standard deviation)

-2,0

-1,1

-3,3

-1,1

-3,6

-1,2

0,8

-2,6

Number of forecasts 250 611 676 674



Forecast combinations per quarter, by category of predictors

(forecasts from combinations with the highest forecasting gains are marked in red)

-1

0

2011IV

-1

0

1

2

2012I


-3

-2

Eco

n. a

ctiv

ity

Lab

our

mar

ket

Touri

sm -

trad

e

Dom

. in

tere

st r

ates

CSE

indic

es

Int. e

con. ac

tivi

ty

Int. s

tock

mar

kets

Int. in

tere

st r

ates

Exch

ange

rat

es

Fore

ign C

PIs

Int. c

om

modity

pr.

EU

confid

ence

ind.

-5

-4

-3

-2

-1

Eco

n. a

ctiv

ity

Lab

our

mar

ket

Touri

sm -

trad

e

Dom

. in

tere

st r

ates

CSE

indic

es

Int. e

con. ac

tivi

ty

Int. s

tock

mar

kets

Int. in

tere

st r

ates

Exch

ange

rat

es

Fore

ign C

PIs

Int. c

om

modity

pr.

EU

confid

ence

ind.




-3

-2

-1

0

2012ΙΙ

-3

-2

-1

0

1

22012ΙΙΙ


-5

-4

-3

Eco

n. a

ctiv

ity

Lab

our

mar

ket

Touri

sm -

trad

e

Dom

. in

tere

st r

ates

CSE

indic

es

Int. e

con. ac

tivi

ty

Int. s

tock

mar

kets

Int. in

tere

st r

ates

Exch

ange

rat

es

Fore

ign C

PIs

Int. c

om

modity

pr.

EU

confid

ence

ind.

-5

-4

-3

Eco

n. a

ctiv

ity

Lab

our

mar

ket

Touri

sm -

trad

e

Dom

. in

tere

st r

ates

CSE

indic

es

Int. e

con. ac

tivi

ty

Int. s

tock

mar

kets

Int. in

tere

st r

ates

Exch

ange

rat

es

Fore

ign C

PIs

Int. c

om

modity

pr.

EU

confid

ence

ind.

Econometric Forecasts - Inflation

Smoothed histogram of all forecasts per quarter from Factor-Augmented ADL models that outperform the random walk

.6.8

1

2011IV

.4.6

2012I

ModeMean

0.2

.4

2 2.5 3 3.5 4 4.5

0.2

1 2 3 4 5

0.1

.2.3

.4

-2 0 2 4 6

2012II

0.2

.4.6

-2 0 2 4 6

2012III



Estimates for the growth of GDP based on the distribution of a large cross section of individual Factor-Augmented models

2011IV 2012I 2012II 2012III

Mode 3,0 2,9 2,3 2,0Mode 3,0 2,9 2,3 2,0

Mean 3,1 2,8 2,1 2,1

Standard deviation 0,40 0,58 1,03 0,84

Forecast band(± 1 standard deviation)

2,8

3,5

2,2

3,4

1,1

3,2

1,3

3,0

Number of forecasts 344 71 81 318





4

5

2011IV

4

5

2012I


2

3

Eco

n.

act

ivit

y

Lab

ou

r m

ark

et

To

uri

sm -

tra

de

Do

m.

inte

rest

…

CS

E in

dic

es

Int.

eco

n.

act

ivit

y

Int.

sto

ck m

ark

ets

Int.

in

tere

st r

ate

s

Exc

ha

ng

e r

ate

s

Fo

reig

n C

PIs

Int.

co

mm

od

ity

pr.

EU

co

nfi

de

nce

in

d.

1

2

3

Eco

n.

act

ivit

y

Lab

ou

r m

ark

et

To

uri

sm -

tra

de

Do

m.

inte

rest

ra

tes

CS

E in

dic

es

Int.

eco

n.

act

ivit

y

Int.

sto

ck m

ark

ets

Int.

in

tere

st r

ate

s

Exc

ha

ng

e r

ate

s

Fo

reig

n C

PIs

Int.

co

mm

od

ity

pr.

EU

co

nfi

de

nce

in

d.




3

4

4

5

5

2012II

3

4

4

5

5

2012III


0

1

1

2

2

3

3

Eco

n.

act

ivit

y

Lab

ou

r m

ark

et

To

uri

sm -

tra

de

Do

m.

inte

rest

ra

tes

CS

E in

dic

es

Int.

eco

n.

act

ivit

y

Int.

sto

ck m

ark

ets

Int.

in

tere

st r

ate

s

Exc

ha

ng

e r

ate

s

Fo

reig

n C

PIs

Int.

co

mm

od

ity

pr.

EU

co

nfi

de

nce

in

d.

0

1

1

2

2

3

3

Eco

n.

act

ivit

y

Lab

ou

r m

ark

et

To

uri

sm -

tra

de

Do

m.

inte

rest

ra

tes

CS

E in

dic

es

Int.

eco

n.

act

ivit

y

Int.

sto

ck m

ark

ets

Int.

in

tere

st r

ate

s

Exc

ha

ng

e r

ate

s

Fo

reig

n C

PIs

Int.

co

mm

od

ity

pr.

EU

co

nfi

de

nce

in

d.

Risks for private consumption

-1

-0.5

0

0.5

-1

0

1


-Derived from employment expectations-economic situation of households as derived from expectations-credit growth

-1.5

-1

2011I 2011II 2011III 2011IV

Services Retail trade Construction Industry

-2

2011I 2011II 2011III 2011IV

Financial situation of household (next 12 months)

Likelihood of savings (next 12 months)

Consumer credit

Impact on Private consumption and GDP

Lower Social Transfers (deviations from baseline)2012 2013

Disposable Income -3,1 -1,0

Pr. Consumption -3,0 -1,0

GDP % -1,5 -0,6

Source: Economics Research Centre


Simulations1. Deviations from baseline2. Reduction of social Transfers by €200εκ.

3. Lower employment rate in 2012 by -0,5 percentage point.4. Freezing of nominal wages, as opposed to increases of 1,5% in baseline.

Impact on Private consumption and GDP

Lower Social Transfers and increase of savings2012 2013

Disposable income -3,1 -1,0

Pr. Consumption -4,7 -2,8

GDP % -2,4 -1,3



Simulations1.Deviations from baseline2.Reduction of social Transfers by €200εκ.

3. Lower employment rate in 2012 by -0,5 percentage point4. Freezing of nominal wages, as opposed to increases of 1,5% in baseline.

5. Lower saving rate over time (details in the report)

Risks from external environment

Lower external demand (deviations from baseline)2012 2013

EU GDP% -1,0 -1,0

Employment -0,5 -0,5

Exports -0,9 -0,9

GDP % -0,5 -0,6Source: Economics Research Centre



Simulation1. Deviations from Baseline2. Lower GDP growth in EU by 1pp3. Lower employment growth during 2012-13 by -0,5% .

Risks from further escalation of spreads

Increase in borrowing costs, translated into lower expenditure to keep fiscal targets attainable

2012 2013

Spread (basis points) +100 -

Disposable income -1,0 -

GDP % -0,5 -Source: Economics Research Centre


Simulations

1. Deviations from baseline2. Increase of costs for servicing debt by 100 bp3. Equivalent cut of social transfers

Investment

0

1

2

3


Main emerging risk: credit growthHistorically correlated with investment, e.g. housing (see diagram)

-1

2011I 2011II 2011III 2011IV

Government Non-financial corporations

Households (housing loans)

Investment shock

Lower investment in 2012 by €100ml2012 2013

Imports -0,3 -

GDP % -0,4 -Source: Economics Research Centre


Simulation

1. Deviations from baseline2. Lower investment in real terms by 100ml

Forecast analysis

Economic Dynamics

captured by model

Forecasts


Exogenous factors and

shocks

Forecasts

The exogenous factors and other shocks are partly captured through the use of forward-looking variables.

Other forecasts

Organisation GDP% 2012

European Commission Nov 11 +0,3

IMF Sep 11 -1,0

Consensus Economics Feb 12 -0,3

Economist Intelligence Unit Feb 12 -1,0

Central Bank of Cyprus Dec 11 0,0Ministry of Finance Sep 11 0,2


Ministry of Finance Sep 11 0,2

Carry-over from 2011 ≈ - ¼ to - ½ pp

Negative carry-over

from 2011 -0.3%


Conclusions

� Monthly GDP index : -1% 2011Q1, 2012 Q2

� Negative carry-over from 2011: -1% based on forecast, -0,3to 0,5% based on flash.

� Econometric forecasts (mode): -1,5%, -2,8%, -2,9%, -1,4% for 2011IV, 2012I, 2012II and 2012ΙΙΙ respectively.

� Due to negative consecutive quarters, and assuming that in


� Due to negative consecutive quarters, and assuming that in 2012Q4 GDP level same as in previous quarter, then GDP for year ≈ -2%

� If 2011Q4 is not revised then forecast is slightly less negative at around -1½%

� Impact of other negative factors and possible shocks ranges [-1% — -3%], external demand and lower private consumption being the main ones.

Documents

Economic Perspectives : 2012 · trade Dom. interest rates CSE indices Int. econ. activity Int. stock markets Int. interest rates Exchange rates Foreign CPIs Int. commodity pr. EU