Cyprus GDP growth forecast at 1.1% in ‘09

The European Commission has slashed the Cyprus growth target for 2009 sharply lower to 1.1%, far below the government’s recently adjusted target of 2.1%, after reducing its forecasts for eurozone growth.
For the 16 member eurozone economy, the European Commission is now forecasting a contraction of 1.9%, which is in line with the prediction made by the Financial Mirror last week citing sources at the Cyprus Finance Ministry.
Amid exceptional uncertainty about global developments, the European Commission released Monday its extended interim forecast. Commission refers to a deteriorated outlook of the European economy as a result of the impact on the real economy of the intensified financial crisis and the ensuing global downturn.
The Cyprus economy will also be negatively affected by global slowdown European Commission estimates, pointing out however that the island will be among the few countries to be less hit, attributing this to the strength of the Cypriot economy.
Commission says that economic activity in Cyprus remained strong in the first three quarters of 2008. However, due to the worsening external environment, GDP is expected to have decelerated in the last quarter of the year, which should lead to an annual growth rate of three and a half per cent.
Economic growth is expected to slow down significantly in 2009 but still remain in positive territory, Commission estimates, pointing out that Cyprus will be one of the euro area three best performing countries in the areas of growth, unemployment and fiscal deficit.
Specifically, Commission forecast estimates that GDP will increase by 1%, while in the euro area will decline by 1.9%.
Domestic demand will continue being the main driver of growth. In the face of a rising household debt burden and an uncertain environment, private consumption is projected to moderate. Housing investment should decelerate strongly, mainly due to subdued foreign demand.
Commission forecast also estimates that after posing a surplus of 1% of GDP in 2008, public finances are projected to move into the red in 2009, on account of subdued revenues, though a rise in current expenditure is offset by a reduction in interest payments. The 2010 deficit is projected at 1% on a no-policy-change basis, due to the increasing trend of current expenditure. The debt–to-GDP ratio is projected to fall to almost 46% of GDP by 2010.
Furthermore, Commission forecast estimates that in line with economic activity, employment growth is projected to decelerate, leading unemployment to rise. Unemployment will increase to 5.1% in 2009 and to 5.5% in 2010, but still Cyprus will record the second best performance in euro area. Following the developments in oil and in commodities, inflation is projected to decrease in 2009 and to edge up in 2010. Due to a modest acceleration in wages, unit labour cost growth is expected to exceed 5% in 2009 before decelerating towards the end of the forecast period.
Inflation in Cyprus is estimated that it will reach 2% in 2009and 2.3% in 2010.
Public debt is projected to be further reduced from 48.1% of GDP in 2008 to 46.7% in 2009 and 45.7% in 2010.
The Current account deficit is estimated that it will be reduced from 13.4% in 2008 to 12% in 2009 and 11% in 2010.