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Economic Perspectives: 2012
Council of Experts ERC1
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Plan of presentation
� Conclusions of Council of Experts
� World Economy
� Cyprus Economy: Latest figures
� Econometric Results
� Risks� Risks
� Conclusions
Council of Experts ERC2
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Conclusions of Council of Experts
Council of Experts ERC3
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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
Council of Experts ERC4
� Dr. Michael Sarris, Former Minister of Finance
� Professor Louis Christofides, University of Cyprus
� Secretary General� Dr Zenon Kontolemis
� Research Director� Dr. Nicoletta Pashourtidou
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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
Council of Experts ERC5
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
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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
Council of Experts ERC6
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
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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
Council of Experts ERC7
-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
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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
Council of Experts ERC8
undertaken on the eve of deadlines
� Government needs to be prepared for higher deficit in 2012
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Report on the economy of Cyprus and
prospects for 2012 by the Economics
Research Centre
Council of Experts ERC9
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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
Council of Experts ERC10
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
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Interest Rates expected to remain low at
least throughout 2012…
Council of Experts ERC11
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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
Council of Experts ERC12
� 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
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Cyprus Economy: Recent figures
Council of Experts ERC13
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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
Council of Experts ERC14
Imports
4th quarter 2011 flash-0,5%
Annual estimate 2011+0,5%
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4th quarter GDP in EU
Council of Experts ERC15
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 (?)
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Economic Sentiment and GDP
Council of Experts ERC16
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Private consumption flat ... use of credit
cards is on the rise…
Council of Experts ERC17
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Slowdown of credit growth, and decline in
deposits…
Council of Experts ERC18
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Construction still struggling, double-dip
emerging…
Council of Experts ERC19
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Imports and exports are decelerating…
Council of Experts ERC20
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Improvement in tourism arrivals… but is it
sustainable?
Council of Experts ERC21
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Expectations in services have retreated…
Council of Experts ERC22
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…and trade statistics reveal slowing
economic activity
Council of Experts ERC23
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Labour market exhibits significant
worsening
Council of Experts ERC24
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Wage growth has diminished, inflation
around 2½-3% in past months
Council of Experts ERC25
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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
Council of Experts ERC26
� 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
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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
Council of Experts ERC27
-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
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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)
Council of Experts ERC28
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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
Council of Experts ERC29
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Econometric Forecasts - GDP
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
Council of Experts ERC30
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Econometric Forecasts - GDP
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
Council of Experts ERC31
-3
-2
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Econometric Forecasts - GDP
Forecast combinations per quarter, by category of predictors
(forecasts from combinations with the highest forecasting gains are marked in red)
-3
-2
-1
0
2012ΙΙ
-3
-2
-1
0
1
22012ΙΙΙ
Council of Experts ERC32
-5
-4
-3
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-5
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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
Council of Experts ERC33
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Econometric Forecasts - Inflation
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
Council of Experts ERC34
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Econometric Forecasts - Inflation
Forecast combinations per quarter, by category of predictors
(forecasts from combinations with the highest forecasting gains are marked in red)
4
5
2011IV
4
5
2012I
Council of Experts ERC35
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Econometric Forecasts - Inflation
Forecast combinations per quarter, by category of predictors
(forecasts from combinations with the highest forecasting gains are marked in red)
3
4
4
5
5
2012II
3
4
4
5
5
2012III
Council of Experts ERC36
0
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Risks for private consumption
-1
-0.5
0
0.5
-1
0
1
Council of Experts ERC37
-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
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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
Council of Experts ERC38
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.
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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
Source: Economics Research Centre
Council of Experts ERC39
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)
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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
Council of Experts ERC40
Source: Economics Research Centre
Simulation1. Deviations from Baseline2. Lower GDP growth in EU by 1pp3. Lower employment growth during 2012-13 by -0,5% .
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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
Council of Experts ERC41
Simulations
1. Deviations from baseline2. Increase of costs for servicing debt by 100 bp3. Equivalent cut of social transfers
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Investment
0
1
2
3
Council of Experts ERC42
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)
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Investment shock
Lower investment in 2012 by €100ml2012 2013
Imports -0,3 -
GDP % -0,4 -Source: Economics Research Centre
Council of Experts ERC43
Simulation
1. Deviations from baseline2. Lower investment in real terms by 100ml
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Forecast analysis
Economic Dynamics
captured by model
Forecasts
Council of Experts ERC44
Exogenous factors and
shocks
Forecasts
The exogenous factors and other shocks are partly captured through the use of forward-looking variables.
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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
Council of Experts ERC45
Ministry of Finance Sep 11 0,2
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Carry-over from 2011 ≈ - ¼ to - ½ pp
Negative carry-over
from 2011 -0.3%
Council of Experts ERC46
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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
Council of Experts ERC47
� 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.