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CYPRUS: Growth to remain robust, but trimmed to 3%, says UCy

26 July, 2017

The expansion of real economic activity in Cyprus is expected to continue at robust rates in 2017 and 2018, according to the Economics Research Centre (CypERC) of the University of Cyprus, which has trimmed its real GDP projected growth from 3.1% in May to 3.0% in the July Economic Outlook.


 
“The slight downward revision resulted from the lower-than-forecasted growth rate in the first quarter of 2017,” the outlook said, adding that “the effects of some macroeconomic developments (e.g. strong fiscal performance, low/negative past inflation, recovering deposits, declining stocks of loans) on growth projections were less pronounced compared to the previous two issues.”
In the second and third quarters of 2017, real GDP is projected to rise (year-on-year) by 2.9% and in the final quarter of the year GDP growth is estimated at 2.8%. In 2018, real GDP growth is forecasted to slightly decelerate to 2.7%.
The CypERC outlook for July said that the factors driving the solid growth rates include: robust activity and employment growth in the first quarter; further positive developments in domestic leading indicators in the second quarter and strong domestic economic sentiment; improving domestic financial conditions, marked by deposit growth and deleveraging, as well as low levels of lending interest rates; and, favourable external conditions, such as steady growth and strong economic sentiment in the EU and the euro area, the resilience of the UK economy amid uncertainty after the Brexit vote, the recovery of the Russian economy, and the favourable performance of international stock markets.
The monthly outlook added that other factors, such as the strong fiscal performance and the low levels of European interest rates (reflecting the accommodative monetary policy stance) facilitated the recovery in Cyprus, as discussed in previous months.
“Nevertheless, as growth gains momentum, the positive effects of these factors on the outlook weaken. The absence of upward pressures to the general price level in the past few years has also backed the economic recovery through its beneficial effects on purchasing power.
“However, as international oil prices and demand pick up, the positive impact of lower prices on real incomes and growth wanes,” the UCy report said.
Downside risks to the growth forecasts include: high ratio of public debt to GDP that renders Cyprus vulnerable to negative shocks; delaying structural reforms and relaxing fiscal discipline, especially in view of the upcoming presidential elections (February 2018), may undermine the sustainability of public finances and growth; and, the high levels of private debt and non-performing exposures continue to pose risks to the economy, despite progress with deleveraging and managing problematic loans (through e.g. restructurings, debt-to-asset swaps, third-party loan servicers).
“The large volume of problematic assets [non-performing loans – NPLs] on banks’ balance sheets and the high indebtedness levels deprive the economy of growth-enhancing investment,” the UCy outlook said.
Finally, the report said that “slower-than-expected growth in the UK and further depreciation of the pound against the euro, as a result of increased uncertainty during the Brexit negotiations, could negatively affect the outlook for the Cypriot economy,” a comment that has been maintained ever since the initial declaration of Britain’s exit plans in 2016.
The July Outlook said that upside risks are associated with public investment in infrastructure and private investment, especially in the sectors of energy, tourism and real estate. Moreover, better-than-anticipated growth outturn in the euro area, stronger-than-expected economic recovery in Russia and the rebound of the rouble may lead to faster growth rates than the current forecasts. In 2017, CPI inflation is forecasted to reach 1.3% and in 2018, inflation is projected to pick up to 1.9%, as activity continues to expand and international oil and food prices gradually rebound.
The impact of Britain and Russia on the Cyprus economy are directly linked to the tourism sector, which saw record arrivals of 3.1 mln holidaymakers in 2016, with these two markets alone accounting for more than half of all holidaymakers, according to Financial Mirror data.
This trend has been on the rise in 2017 as well, with first half arrivals already up 14%, with increases recorded yet again from Britain and Russia.