Tuesday, 19 July 2011

The cost to GDP of the Vassiliko for 2011: Bringing the economy down by -1.6%

Apparently (I have not had the chance to verify it) The Economics Minister has argued that the Vassiliko Explosion will reduce our growth from 1.5% this year to 0%. It means that the public assertion of Mr. Stelios Platis that the maximum damage can be a reduction of GDP by -1% is not believed by the Cypriot Government, as the Cypriot government expects a fall of at least -1.5%. I feel vindicated in saying that things are much worse than Mr. Platis suggested on the panel on Monday.

I have many reasons to doubt however if the Ministry number is accurate. Even if the first quarter GDP of 2011 showed we were on our way, there is no doubt that industry and retail felt that the second quarter there was a slowdown as unemployment was higher than what we expected during the tourist season.

I have thus converted my own estimates to GDP effects in order to have an attempt to calculate the effect on GDP. I corrected my previous estimates for several issues:
1) Electricity power cuts will be less severe thanks to T/C power. Hence time spent off work for those affected was reduced to just two hours a day (5 day working week).
2) I added the urban effect of Nicosia, which suggests that more people come to work in Nicosia from areas that might have uninterrupted electricity, by increasing the affected rate of Nicosia labour from 80% to 89%.
3) I argued that since Gross Fixed Capital Formation (i.e. creation of new capital) was 2.8 bn in 2010, it is not possible to invest more that 500 million to repair Vassiliko until the end of the year.
4) Thus there is a positive effect of rebuilding Vassiliko of 500 million, with its positive multiplier mean there is a positive GDP effect of 746 million.
5) I have also argued that the reduction of the capital to labour ratio will reduce our growth. If 30% of Growth is from capital deepening, and since capital stock took a hit of 6% due to Vassiliko and other failures of stock, then a reduction of the expected growth rate by 0.30% is very likely.
6) I added the cost of IT repair and IT systems after the demand of friends who constantly complain about this issue. I argued it only affects Tertiary companies and it affects then by raising costs (and hence intermediate consumption) by 0.005%. Let me know if this is valid or if it should be removed since it is a transfer payment between industries.

The results are shown below:

The effect is bad. I fully stand by my numbers and argue that at best we scrape with -1.5 / -1.7%% of GDP for 2011.

However i would not be a good researcher if I did not indicate what can alleviate the losses:

1) Faster, uninterrupted power supply. The above is based on regular power back on the the 18th of December. A faster power normalcy will can dramatically reduce the GDP impact.
2) A faster reconstruction of Vassiliko than the 500 million I suggest until the end of the year.

Here I would like to appeal for help. I have a very old input output table, and crappy capital stock and growth accounting for Cypriot growth. Being a fan of crowd sourcing I appeal anyone with relevant information to send it my way and we can work together.
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