Growth in 2016 is expected to strengthen, as real GDP is forecasted to expand by 2.4%, according to the April economic outlook issued by the Economics Research Centre of the University of Cyprus.
The y-o-y percentage change of GDP is projected at 2.2% and 2.1% for the first and second quarter of 2016, respectively, and at 2.7% for the second half of the year, the UCy monthly report said.
The main drivers of the projected increase in real activity are five:
• The growth rate (y-o-y) of real GDP and employment strengthened, while unemployment declined in the final quarter of 2015; many domestic leading indicators continued to improve in the first quarter of 2016.
• Declining international oil and non-energy commodity prices that put downward pressures to the aggregate price level are expected to benefit activity through their effects on real incomes and demand.
• The downward trend in domestic lending interest rates, amid conditions of weak demand and elevated unemployment as well as stronger normalisation tendencies in the banking system, facilitate the recovery.
• Domestic economic confidence strengthened further in the fourth quarter of 2015 and during the first quarter of 2016 leading to an improved outlook for 2016.
• The fiscal performance that has been bridging the gap between government expenditure and revenue is expected to positively contribute to a sustainable recovery.
Strong economic confidence and the expansion of activity in the EU and the euro area – as well as the low levels of European lending interest rates – have been supportive of the recovery in Cyprus. Nevertheless, some recent developments in foreign leading indicators (confidence, zero/negative interest rates, stock market returns) that provide signs of a less favourable external economic environment, are found to have some dampening effect on domestic growth, revealing the vulnerability of the Cypriot economy to global conditions.
Downside risks to the growth projections are associated with the following factors:
• The high levels of non-performing loans continue to pose major risks to the stability of the banking system and to the outlook for the economy. Ineffective implementation of the new insolvency and foreclosure legal framework could delay the resumption of healthy credit conditions and sustainable economic growth; thereby, prolonging the uncertainty in the property market, which feeds back into banks’ balance sheets.
• Loss of momentum in structural reforms may create risks to public finances, Cyprus’s credibility and market borrowing costs.
• Deterioration of the external economic environment for Cyprus due to: (a) continuation of the recession in Russia (oil exporter) in conditions of protracted declines in oil prices; (b) weaker than expected growth in the euro area as a result of worsening global economic conditions; and, (c) slower than expected growth in the UK and further weakening of the pound against the euro as a result of a global slowdown and the political uncertainty regarding the future of the country in the EU.
• Political uncertainty in Europe triggered by, for example, Britain’s potential exit from the EU or the handling of the refugee crisis, could lead to increased economic uncertainty and undermine economic confidence.
Upside risks to the outlook relate to a longer period of lower international oil prices, investment decisions linked to the sectors of tourism and energy as well as public investment projects.
CPI inflation in 2016 is projected at -0.8%. The negative inflation projection is driven by further declines in international oil prices and lower international prices of non-energy commodities combined with sluggish demand.
