The year 2015 is one in which the economy is supposed to return to growth of 0.4% after three consecutive years of decline. This is what the government says, this is what the Troika says and this, plus another percentage point, is what the Central Bank governor says.
The apparent consensus tells us less than it might seem. When you are in a Troika bailout programme you slavishly repeat the Troika’s forecasts whether you believe them or not. But the problem with Troika forecasts is that, because they come from big institutions, they go through various layers of management approval before they are published. So while they are doubtless far more sophisticated when it comes to very long-term forecasts than my own, in the short term they are always, always out of date, regardless which country you are looking at.
Just to give you a recent example, the Troika’s most recent estimate for 2014, published in October, is for a real GDP decline of 3.2%. To get to that figure in practice you would have needed a massive contraction of 4% year on year in the fourth quarter. That simply did not happen.
Businesses need up to date forecasts so that they can plan for likely fluctuations in cash flow. This is why I revisit my own forecast for GDP, debt, inflation, unemployment and so on every month. To the best of my knowledge, my company is the only institution in the world that does so. So what am I forecasting for 2015?
I am afraid I am not forecasting growth for the whole year. Instead I expect a general improvement but contraction of 0.7% for the year as a whole. I have a positive growth rate only in the final quarter of the year. Admittedly with such small numbers in a small economy it could swing both ways. And anyone who has tried forecasting knows that revisions to back-data can suddenly make things a lot better or worse than when you initially drew up your forecast.
Revisions to previous releases are one reason why forecasts should be viewed less for the accuracy of the specific number predicted than as a metaphor for the direction in which we are heading. In that sense, the Troika forecast can be interpreted as “the bad times are definitely behind us”, while my forecast can be read as “a few more bumps before we are really there”.
Here are the reasons why I am, on balance, more pessimistic than the Troika for 2015. First and foremost, is the “rouble rout” that has taken place in recent weeks. At the time of writing this had knocked 40% off the value of the rouble against the euro. Russians account for one in four tourists these days. That means that Cyprus just got 40% more expensive for one-quarter of the entire tourism market.
Related to the rouble rout is the weakening of the Russian market generally. Professional services, that is the lawyers and accountants serving mainly international clients, was one of the only sectors that grew in 2014, despite capital controls and the general fallout from the crisis in 2013. However, the falling price of oil, the weakening economy, combined withthe new “deoffshorisation” rules, mean that life will be considerably tougher for lawyers and accountants in 2015 than in 2014.
A second likely impact on demand in 2015 will be the implementation (assuming it finally happens) of the foreclosure legislation. This will give people stronger incentives to repay the bank, rather than spend money on electronics and clothes, which the retail figures suggest they have been doing.
A third negative development for 2015 is the fact that the Onasagorou well in Block 9 came up dry. As it turned out, all the geological surveys were accurate in predicting that once upon a time there had been gas, but sometime in the past few millennia it had escaped. Such is the unpredictability of gas exploration. Only now does the minister tell us that each drill has only a 26% chance of success. If large quantities of gas had been found, this would have acted as a positive boost to sentiment generally, which in turn would have supported demand. Nor does it look like Block 11 will save us. Rumours are beginning to pop up in the media that Total will not drill in 2015 as planned. Whether that is because falling gas and oil prices are making deepwater drilling less viable, or, more worryingly, if France’s largest company has been frightened off by Turkey’s Barbaros seismic ship, we do not know. But if Total does not drill it will be yet another blow to the country’s oil and gas ambitions.
There are still some factors that would have a positive impact on demand in 2015. The first is the complete lifting of all remaining capital controls. If one judges trust in the banking system by the number of times I get asked at the kiosk if another haircut is coming, one should not underestimate the positive impact this will have. It will also boost foreign investor sentiment. Cyprus is still dubbed the only Eurozone country with capital controls. The second is the impact of falling oil prices on our electricity bills and petrol costs. Assuming that at least some of the reduction is passed onto consumers, this will release disposable income. The third reason is a little less tangible than the first two, and that is normalisation generally.
By March 2015 we shall have passed two whole years since the banks closed for 12 days in a row, we wondered if we would ever see a Cypriot euro again and I decided it was time I learned how to grow potatoes. While we are all poorer than when it all began, things are more or less back to normal. This may turn out to be just as important for economic growth as more measurable factors.
Fiona Mullen, (Director, Sapienta Economics Ltd)
