Cyprus to maintain growth rates above Euroland average in 2008-2009

PricewaterhouseCoopers’ latest economic analysis shows that Cypriot economic growth accelerated to 1% in the first quarter of 2008 due to resilient consumer spending growth and a rebound in investment growth. Since the adoption of the euro on January 1, 2008, exports have contracted while imports have grown strongly. The Cypriot economy is expected to maintain a strong pace of expansion, growing by 3.6% in both 2008 and 2009. The growth rate is above the expected Euroland average of 1.7% in 2008 and 1.6% in 2009.
Unemployment has remained at 3.6% since the turn of the year. This plateauing after months of falling unemployment is an indication that the economy is starting to slow. Inflation is a growing concern. The rate of inflation picked up again in May to 4.6%, above the Euroland average of 3.7%, driven by steep price increases of imported commodities.
Since adopting the euro, Cyprus has ceded monetary policy functions to the European Central Bank (ECB) and is no longer able to implement interest rate and foreign exchange policies that are tailored to the Cypriot economy. Despite the weakening prospects for the Euroland economy, the ECB is maintaining a relatively hawkish monetary policy, with a moderate rise in interest rates expected this summer, and interest rate reductions unlikely before 2009, as the rate of inflation consistently exceeds the ECB’s 2% target.
Looking forward, the immediate positive impact on consumer and business confidence of adopting the euro is expected to abate. Furthermore, exports growth is likely to remain on a downward trajectory due to an appreciating euro as well as a reduction in demand from the rest of the Euroland, Cyprus’s main trading partner.
“Cypriot economic growth is expected to decelerate from its seven-year high in 2007 as external demand eases due to an appreciating euro and slowing demand from the rest of the Euroland,” said Stephos Stephanides, board member and Leader, Advisory Services at PricewaterhouseCoopers.
“Inflation remains a risk for the Cypriot economy, especially since it no longer has a tailor-made monetary policy. Nevertheless, domestic demand growth is expected to remain strong, with the Cypriot economy expanding at a rate above the Euroland average in both 2008 and 2009.”