CYPRIOT economic actors think that focusing on the right practical measures, rather than the psychology of the consumer, will create a climate of confidence.
The comments came after the latest University of Cyprus survey of business and consumer confidence, published earlier this week, showed a marked drop in how positively the public regards the island’s economic prospects. One school of thought claims that at least part of the blame for this negative outlook lies with the “doom and gloom merchants”, including the media.
An extreme version of this view was expressed in the UK on Monday by Lord Digby Jones, former head of the Confederation of British Industry and, until last October, Trade Minister under Gordon Brown.
Speaking to the House of Commons Select Committee on Business and Enterprise, Lord Jones attacked the tendency of the British media to spread gloom about the state of the nation. He recalled talking to a picture framer from Harrowgate, a business “at the wrong end of discretionary spending”, who had had two good weeks – one when Barack Obama was elected and one when Jonathan Ross and Russell Brand were in the headlines.
“When the recession wasn’t first item on the news every day, the spenders were out there spending,” said Lord Jones. “I say this with great sensitivity to those out of work and worried sick about their jobs, but the vast majority in [the UK] are still at work, the vast majority of those who went into this recession will come out owning their homes. A lot of the issue is about confidence.”
Local “opinion-shapers” were less outspoken when the Cyprus Mail canvassed their views.
The Finance Ministry thinks that, rather than try to create a “feelgood factor” through simply talking up prospects, it is important for people to think about the practical measures it has already taken, for instance the large injections of liquidity into the banking market.
The Ministry expects that, once the public starts to get over its initial shock at the global crisis, people will take stock of their current financial situation, will be reassured and so will become less reluctant to spend significantly. So in this respect, helping the banks with liquidity will encourage consumption, or what is trendily called “collective retail therapy”.
An economist linked to the Central Bank echoed recent statements by Finance Minister Charilaos Stavrakis. He said that although what will happen to the economy here depends to a large extent on what happens internationally, Cyprus has avoided the kind of large-scale shocks – banking crisis, rapidly-accelerating unemployment – that have hit European partners. Despite an obvious economic slowdown, household income is still stable, and the economic measures already announced by the Finance Ministry are having a positive effect. “So historically, we are going through difficult times, but our economy is basically sound, and we should get through OK”, he concluded.
DISY deputy Averoff Neophytou was more circumspect when asked his view. “Running the economy is not just about the psychological aspect, you need the right policies to get the right results.” He advocates a collective approach: “We need a national conference on the economy involving all the relevant actors, because we may well have not yet experienced the full depth of the crisis.” As for consumer spending, Neophytou pointed out that Cyprus has one of the highest levels of household debt in the EU, and is running a current account deficit of 16 per cent, so he is not about to tell people to “spend your way out of the crisis”. “Cypriots have become used to spending their bank loans rather than their savings. We need to strengthen the real economy, because after all, how can we build an economy on consumption?”
Economist Costas Apostolides is convinced that the right practical measures will create their own momentum of confidence. “First of all, interest rates must come down.” One way to achieve this would be for the Central Bank to gradually reduce the block on banks using their foreign exchange deposits. Second, the government must put liquidity into the construction industry – “it must help the private sector in obtaining funds for public projects.” One way would be to extend government guarantees to bank loans. Third, the government must greatly expand its programme of public works, promoting projects that are ready to go. Fourth, “the government should stop being an impediment to development. It still takes far too long to obtain planning permission, and there is too much taxation of housing.” He added: “The 20 per cent capital gains tax on land sales acts like VAT on the price, which restricts market movement. No-one in the government is taking a holistic view of the construction sector.”
