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US market meltdown unlikely to affect Cypriot economy, economists say

New York Stock Exchange (EPA)

The chief economists of two major Cypriot banks said that they do not consider that the current stock market turbulence in the US is likely to affect the economies of Europe and Cyprus.

Still, they said, while the positive prospects of the Cypriot economy remain, they are more concerned about the probable impact from a failure to continue the reform process and address challenges that policymakers need to tackle.

The Dow Jones Monday dropped by 1,175 points – the largest drop measured in points in its history in a single-day – or 4.6 per cent compared to Friday, which was also the largest drop in a single day since August 2011.

This “qualifies as a correction for the time being as the underlying long-term trends remain upwards still,” said Bank of Cyprus’s economist Ioannis Tirkides in a telephone interview on Tuesday. “While disbelief about the sustainability of the US public finances appear to have triggered market concerns, following the latest tax reform and the expected phasing out of the Fed stimulus, other factors such as geopolitical tensions on the Korean Peninsula or the Sino-American relations appear to also play a role”.

“To which extent this is probable to affect the euro area’s economy, including that of Cyprus, remains uncertain for the time,” he said adding that economic growth projections in Europe remain positive.

His Hellenic Bank colleague, Andreas Assiotis, said that the market meltdown which started a week ago, is also unlikely to affect the global economy. “While some trend towards protectionism is causing concern, we see that there is a broad-based consolidation of economic growth world-wide which includes major economies, such as that of the US, the EU and China,” he said.

The US market is reacting to expectations at the US economy was “steering towards a normalisation of interest rates,” amid uncertainty following the appointment of Jerome Powell at the helm of the Federal Reserve replacing Janet Yellen who favoured a gradual tightening of monetary policy, Assiotis added.

“But this is unlikely to directly affect interest rate levels in the euro area including Cyprus at least in the short term,” the head of Hellenic’s economic research department said.

“After all, the European Central Bank (ECB) is expected to continue with its low-interest rate policy,” and its expanded asset purchase programme, dubbed quantitative easing, as core inflation remains “stubbornly low,” Assiotis added.

For Tirkides, the pace of the political process in Europe’s integration, in the second year after it saw Britons voting in favour of leaving the EU, could to some extent also affect one way or another the performance of the European economy.

“While all projections for economic growth in Europe are positive, the outcome of upcoming elections in Italy is a concern as a source of potential political instability that may affect the process of further integration in Europe at the current juncture,” the Bank of Cyprus economist added. “Following the favourable elections in France and Germany, Europe has started a debate about its future, and further integration, is the agenda”.

In addition, as President Nicos Anastasiades who two days ago won the presidential elections lacks a majority in the parliament, domestic politics are also more likely to determine the economy’s future performance than inflation concerns in the US which led to the recent bloodletting at the Wall Street, Assiotis continued.

“The fiscal consolidation has to continue unobstructed,” Assiotis said. “At the same time, we need to proceed with all the pending reforms which will enhance the long-term prospects of the economy”.

Cyprus which completed two years ago its economic adjustment programme agreed with international creditors in exchange of a bailout, has not completed fully the reform package it agreed and is still facing risks stemming from the high level of the private sector indebtedness and the non-performing loans of its banks which account around 45 per cent of the total.

“Are we going to see reforms?” asked Assiotis. “Are pending reform bills going to be passed by the parliament? Are we going to see institutional growth including a strengthening of the rule of law which ultimately translates to more economic growth?”

The Cypriot economy is projected to have expanded last year around 3.6 per cent, compared to 3 per cent the year before and 2 per cent in 2015, when it emerged from a prolonged recession. This year, the economy is forecast to grow 3 per cent.

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