EIU forecasts growth slowdown in 2006

In its March Country Report the Economist Intelligence Unit (EIU) forecasts real GDP growth to slow to 3.4% in 2006 from 3.8% in 2005, largely because of an expected slowdown of domestic demand in the UK, which will act as a drag on the tourist sector. Growth is expected to pick up slightly to 3.6% in 2007.

Cyprus is expected to adopt the euro in 2008 as planned. Talk of postponing euro area accession by parties such as AKEL is seen as “pre-election rhetoric”, and the EIU expects Cyprus to “clear all hurdles for euro area accession in 2008”.

Although the EIU finds that the government’s growth forecast for 2006 of 4.2% is “optimistic”, its latest budget forecast assumes that the government’s determination to meet requirements for the euro means that it will cut the budget deficit further than forecast.

The Economist Intelligence Unit, a sister company of the Economist, thus forecasts a budget deficit of 1.7% of GDP in 2006 instead of the government’s projection of 1.9%.

The EIU notes that Cypriot money market interest rates are still slightly higher than those of other countries in ERM2 and it expects further convergence in rates, which will come “largely through further rate increases on the part of the ECB”.

A fall in the general government debt to GDP ratio will allow Cyprus to meet the Maastricht deficit and debt criteria, while a harmonised consumer price inflation rate (HICP) of 2.0% in 2006 and 1.8% in 2007 (CPI of 2.4% and 2.2% respectively) will allow Cyprus to meet the Maastricht inflation criterion.

On the political outlook, although the EIU believes there is a “significant chance” that negotiations to solve the Cyprus problem may restart in 2006, it does not expect a solution by the end of the forecast period in 2007.

“The hardline stance of the government, led by Mr Papadopoulos of

the smaller Democratic Party (Diko), has not brought any progress on the Cyprus question,” says the report.