Cyprus to maintain dynamic growth, says PwC report

— Smooth transition from pounds to euros

 

PricewaterhouseCoopers’ latest economic analysis shows that the Cyprus economy continued to grow at a rapid pace in the third quarter of 2007, and is expected to expand by 4.1% in 2008 as a whole after an estimated 4.2% growth in 2007.

This growth is significantly above the expected Euroland average rate in both years. The pace of growth for the Euroland economy as a whole is estimated at 2.6% in 2007 and is expected to reach 2.1% in 2008.

The PwC report focuses on the importance of the domestic economy in Cyprus’ solid record of GDP growth in recent years. Moreover, the report highlights the improved fortunes of the important tourism sector, which experienced a particularly solid summer in 2007. The introduction of the euro, and the associated price transparency with competing European tourist locations, may result in the emergence of aggressive pricing policies in 2008 by Cypriot tour operators.

Looking ahead, the contribution of the domestic economy is expected to outweigh that of the export sector once again in 2008. Consumer spending is projected to perform well in 2008 owing to favourable labour market conditions and reasonably low interest rates. The PwC report finds that Cypriot exports performance is likely to improve in 2008, owing to sustained demand for Cypriot products in the main export markets, namely the UK and Euroland.

The report also suggests that some moderation is anticipated in the Euroland economy in 2008 owing to the lagged effects of past ECB interest rate rises, a further possible appreciation of the euro and a loss in confidence related to global capital market turmoil.

The ECB is expected to leave interest rates at around the current level in 2008, owing to fears of an economic slowdown related to the current credit tightening, while overall inflationary pressures dissipate only gradually.

“The economic outlook for the Cyprus economy continues to be positive and the introduction of the euro in 2008 is expected to give it an additional boost,” said  Yael Selfin, Head of Macro Consulting at PricewaterhouseCoopers. “Going forward, it will be important to watch inflation closely, given the upside risks from robust domestic demand, robust credit growth, lower interest rates and high oil and food prices.”

 

Table 1 – Euroland, Cyprus & UK real GDP growth prospects

 

Source: Eurostat actuals (a); PricewaterhouseCoopers estimates (e) forecasts (f).