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CYPRUS: Growth to slow in 2019-2020, as EU moderates amid global uncertainties

08 February, 2019

The growth rate of the Cyprus economy is expected to slow down over the next two years, despite enjoying near-4% levels of increase in the gross domestic product (GDP), according to the latest European Commission Winter 2019 Economic Forecast.


This is also in line with the general mood in the rest of the European Union, where the overall pace of growth is projected to moderate compared to the high rates of recent years and the outlook is subject to large uncertainty.

The report for Cyprus said that in 2019 and 2020, growth is projected to slow down to 3.3% and 2.7%, due to the less favourable external environment. Slowing growth in the euro area and persistent uncertainties in major trading partners weigh on Cyprus’ outlook and increase downside risks, the EC report said.

However, the quarterly forecast report seemed confident that an improving labour market, increased disposable income and the construction sector will keep the Cyprus economy in positive territory.

“Employment gains and higher wages are expected to boost disposable income and to support private consumption. Public consumption is also expected to grow amid rising wages and employment in the public sector. Investment should make a positive contribution in 2019 on the back of strong construction activity,” the report said.

Comments on social media suggest that wage increases in the public sector, driven by the administration’s promises of reinstating civil service payrolls to pre-crisis levels, are not in concert with the wages in the private sector where they remain static for nearly six years.

Furthermore, the optimism of “strong construction activity” may also be short-lived, and possibly subject to review and further downgrade in the Spring forecast, as the passports-for-property scheme is under extreme pressure to be disbanded, after Malta and Bulgaria were the last to announced they were abolishing similar schemes.

At the same time, a report from the Land Surveys Department indicated an 8% drop in property sales to foreigners in January, on the back of a 48% drop in sales contracts submitted in December, suggesting a slowdown in the property sector as well.

Looking back, the EC Winter Forecast said that the Cyprus economy grew strongly in the first three quarters of 2018, although real GDP growth in the third quarter (3.7% y-o-y) was the lowest of the year. Economic sentiment rebounded in the fourth quarter after a soft patch in the second and third. For the year as a whole, real GDP growth is expected to reach 3.8%, following 4.2% in 2017.

The report added that “the labour market continues to perform strongly. Employment increased by 3.7% (y-o-y) in 2018-Q3 and compensation per employee by 1.9% (compared to 0.7% in 2017). Despite rising household income, consumer confidence dipped, influenced by the sale and winding down of the Cyprus Cooperative Bank. The bank was the second largest in the country and held many household and SMEs deposits. Survey data signalled that the construction sector continued hiring in the fourth quarter.”

The EC report said that inflationary pressures remain very weak. Consumer price inflation stood at 0.8% in 2018, only marginally higher than a year before. Inflation accelerated in the second half of the year, driven by energy and unprocessed food prices. Core inflation throughout 2018 fluctuated around zero, as moderately higher prices of services were offset by falling prices of non-energy industrial goods.

“Over the coming quarters, two opposing forces will be at play: rising disposable income, which will fuel price pressures; and lower oil prices, which will dampen them. Overall, headline inflation is expected to ease to 0.7% in 2019. As the impact of lower oil prices fades, inflation should pick up moderately in 2020 to 1.2%,” the EC’s Cyprus report concluded.

 

EU growth moderates

 

The EC Winter 2019 Economic Forecast said that the European economy is expected to grow for the seventh year in a row in 2019, with expansion forecast in every member state. The pace of growth overall is projected to moderate compared to the high rates of recent years and the outlook is subject to large uncertainty.

“All EU countries are expected to continue to grow in 2019, which means more jobs and prosperity. Yet our forecast is revised downwards, in particular for the largest euro area economies. This reflects external factors, such as trade tensions and the slowdown in emerging markets, notably in China,” said Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union.

“Concerns about the sovereign-bank loop and debt sustainability are resurfacing in some euro area countries. The possibility of a disruptive Brexit creates additional uncertainty. Being aware of these mounting risks is half of the job. The other half is choosing the right mix of policies, such as facilitating investment, redoubling efforts to carry out structural reforms and pursuing prudent fiscal policies.”

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, added: “After its 2017 peak, the EU economy's deceleration is set to continue in 2019, to growth of 1.5%. This slowdown is set to be more pronounced than expected last autumn, especially in the euro area, due to global trade uncertainties and domestic factors in our largest economies. Europe's economic fundamentals remain solid and we continue to see good news particularly on the jobs front. Growth should rebound gradually in the second half of this year and in 2020.”

Economic momentum at the start of this year was subdued, but the fundamentals remain sound. Economic growth will continue, albeit more moderately, the EC Winter Forecast said.

The European economy is set to continue to benefit from improving labour market conditions, favourable financing conditions and a slightly expansionary fiscal stance. Euro area GDP is now forecast to grow by 1.3% in 2019 and 1.6% in 2020. The EU GDP growth forecast has also been revised down to 1.5% in 2019 and 1.7% in 2020.

Among the larger member states, downward revisions for growth in 2019 were sizeable for Germany, Italy, and the Netherlands. Many continue to benefit from robust domestic demand, also supported by EU funds.

A high level of uncertainty surrounds the economic outlook and the projections are subject to downside risks. Trade tensions, which have been weighing on sentiment for some time, have alleviated somewhat but remain a concern. China's economy may be slowing more sharply than anticipated and global financial markets and many emerging markets are vulnerable to abrupt changes in risk sentiment and growth expectations. For the EU, the “Brexit” process remains a source of uncertainty.

In the light of the process of withdrawal of the UK from the EU, projections for 2019 and 2020 are based on a purely technical assumption of status quo in terms of trading patterns between the EU27 and the UK. This is for forecasting purposes only and has no bearing on the process underway in the context of Article 50, the EC report concluded.