Recession is expected to ease in Cyprus in 2014 and growth is set to return in 2015 as domestic demand recovers, according to the European Commission`s winter 2014 forecast released on Tuesday.
Following a better than expected performance last year, the fiscal situation is set to improve further this year and next, it is noted.
According to the forecast, economic activity is expected to have contracted by 6.0% in 2013, which is significantly lower than projected in the autumn 2013 forecast. This reflects, on one hand, resilient performance of the tourism and professional service sectors, and on the other hand, a smaller than anticipated decline in private consumption.
A substantial adjustment in prices and wages also helped curb the decline in real GDP. Nevertheless, several factors continued to weight on economic growth, including tight credit conditions, private and public sector deleveraging and worsening labour market conditions.
Business sentiment and consumer confidence indicators suggest a continuation of the recession. The real GDP is projected to decline by 4.8% in 2014, with domestic demand weighed down by the need for an adjustment of private and public sector debt from currently high levels. Tight credit conditions will continue to act as a drag on growth. Downward wage adjustments are expected to continue, weighing on disposable income.
On the back of further shrinking of imports and a lesser fall in exports, a positive contribution to growth is expected from net trade.
In 2015, the recession is expected to come to an end, with growth seen to resuming gradually, as private domestic demand regains strength. The restoration of a sound and well-capitalised banking sector and the gradual deleveraging of both households and corporates are expected to progressively remove the impediments to more balanced growth. Export of goods and services are forecast to grow, accompanied by a marginal increase in imports.
Unemployment is projected to peak in 2014 before falling slightly in 2015. Unit labour costs are expected to edge further down, driven by a further decline in compensation of employees.
The general government deficit for 2013 is estimated to be significantly better than projected earlier, reaching 5.5% of GDP. However, the deficit is project to widen slightly to 5.8% of GDP in 2014.
This is mainly due to falling profits as well as declining wages and employment in the private and public sectors that are expected to translate into lower revenues from direct taxes.
Further drop in private consumption is set to weigh on the revenues from indirect taxes.
On the expenditure side, further effort to reduce the public sector wage bill, intermediate consumption and other current expenditure is projected to outweigh the increase in social transfers driven by the further worsening labour market conditions.
In 2015, the improving macroeconomic situation and better labour market conditions are expected to support revenue from taxes and social contributions, while total expenditure is projected to remain largely unchanged, with higher pension payments in the private pension scheme, largely offset by a deceleration of the retirement wave in the public sector.
After a sharp increase in 2013, the debt-to-GDP ratio is expected to further increase in 2014 and 2015, broadly reflecting the macroeconomic conditions.
The forecast for Cyprus was finalised in early February, after the third Programme review and before the fourth quarter flash estimate of GDP became available.
The European Commission`s winter forecast foresees a continuation of the economic recovery in most member states and in the EU as a whole. After exiting recession in spring 2013 and three consecutive quarters of subdued recovery, the outlook is for a moderate step-up in economic growth. Following real GDP growth of 1.5% in the EU and 1.2% in the euro area in 2014, activity is seen accelerating in 2015 to 2.0% in the EU and 1.8% in the euro area.
These figures each represent an upward revision of 0.1 percentage points compared with the autumn 2013 forecast.
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