The Cyprus economy will shrink by a less than expected 3.1% in 2014, according to the latest monthly forecast by Sapienta Economics, a Nicosia-based consultancy.
Real GDP fell by a seasonally adjusted 4.1% year on year in the first quarter of 2014 (0.7% quarter on quarter), compared with 4.9% in the fourth quarter of 2013 and 5.4% for the whole of 2013.
In 2013 Cyprus suffered a banking crisis, leading to an unprecedented decision to impose losses on in uninsured bank depositors and other creditors to recapitalize Bank of Cyprus, the largest lender in what was known as a bail in or haircut.
In May the troika of international lenders revised up its expected 2014 decline to 4.2% from a previous estimate of 4.8%.
“One of the reasons I am forecasting a lot less than 4% is simple mathematics,” says Sapienta Director, Fiona Mullen.
“The second-quarter decline of 6% in 2013, right after the peak of the crisis, was the steepest. So you are not going to get another 4.1% decline in the second quarter of this year. But a whole range of other indicators also show that the decline has really bottomed out.”
Mullen notes that plastic card spending rose year on year for three straight months in March to May, the falls in retail sales and imports have been getting milder and there are positive reports from the tourism sector about arrivals this year.
“Other developments also continue to boost the sentiment indicators: bank deposits rose in April for the first time in 16 months, Bank of Cyprus has made a small profit thanks to stable non-performing loans, government finances are improving and it plans to tap the bond markets nearly two years earlier than expected. This is why I am expecting a decline of just 3.1% this year.”
Sapienta Economics is less optimistic for 2015, however. The troika of international lenders expects growth of 0.4%.
“We have had massive disinvestment: in real terms fixed investment was smaller in 2013 than it was in 1995,” says Mullen.
“On top of that we have a very high corporate and household debt burden, a banking sector unable to lend and we are still a long way away from natural gas revenues.
“So while I am optimistic for Cyprus in the short term, I am far more cautious about the economy’s long-term capacity to grow.”
Sapienta Country Analysis Cyprus is published every month: https://sapientaeconomics.com/country-analysis-cyprus/
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