* UCy maintains growth at 3.1%, better than in 2016 *
Economic sentiment increased in May as the Economic Sentiment Indicator of the University of Cyprus Economics Research Centre (ESI-CypERC) rose by 2.3 points compared with April. The increase was driven by confidence improvements in services, retail trade and among consumers, the research centre said.
The improvement in confidence is also in line with an earlier projection for the economy, with the UCy research centre expecting GDP growth at 3.1% this year.
The monthly ESI Services Confidence Indicator rose as a result of more optimistic views expressed by firms regarding their past business situation as well as their past and expected demand.
The Retail Trade Confidence Indicator increased marginally as the more favourable assessments of the volume of recent sales and stocks were almost offset by weaker sales expectations.
The Construction Confidence Indicator decreased due to firms’ downward revisions of future employment plans.
The Industry Confidence Indicator declined mainly as a result of the downward revision of production expectations.
The Consumer Confidence Indicator rose because of more optimistic responses regarding households’ future financial situation, savings plans and the decline in unemployment over the next 12 months.
The UCy Research Centre had said in its monthly economic outlook for May that “the expansion of real economic activity in Cyprus is expected to continue in 2017 at slightly faster rates vis-à-vis those registered in 2016. In 2017, real GDP is projected to grow by 3.1%.”
In the first quarter of 2017, real GDP is projected to rise (year-on-year) by 3.5% and in the second quarter GDP growth is forecasted at 3.1%. In the second half of 2017, real activity is forecasted to grow by 3.0% (year-on-year).
The contributing factors in the strong growth rates forecasted include solid activity and employment growth in 2016 and positive developments in many domestic leading indicators in the first quarter of 2017, including further strengthening of domestic economic sentiment.
Also contributing are less adverse domestic financial conditions as the normalisation process of the domestic banking sector has progressed (e.g. deposit growth, deleveraging) and lending interest rates have declined further. Other domestic factors, such as the strong fiscal performance and past declines in the domestic price level.
Favourable external economic conditions, such as moderate activity growth in the EU and the euro area, stronger-than-expected growth in the UK after the Brexit vote, the moderation of the recession in Russia and rising economic sentiment in the EU and the euro area, are also positive factors, while other external factors include the low levels of European interest rates and the improved performance of foreign stock markets in recent quarters.
Explaining the downside risks, the UCy research centre said “in conditions of elevated unemployment and subdued property prices, the high levels of private debt and non-performing loans continue to pose risks to the economy, despite progress with deleveraging and loan restructurings. Ineffective implementation of the available legal tools heightens the risks arising from the banking sector, while the high public debt-to-GDP ratio renders Cyprus vulnerable to negative shocks.”
Stalling structural reforms and relaxing fiscal discipline, especially in view of the upcoming elections, may undermine the sustainability of public finances and growth.
Slower-than-expected growth in the UK and further depreciation of the pound against the euro, as a result of increased uncertainty following the Brexit vote, could adversely affect the outlook for the Cypriot economy.
Upside risks to the outlook relate to the economic recovery in Russia as oil prices and the rouble are rebounding. Moreover, public infrastructure projects and private investment decisions (related to e.g. energy, tourism, shipping, real estate) could boost the economy’s prospects.
The geopolitical situation in the eastern Mediterranean involves both downside and upside risks to the outlook that may affect domestic activity primarily through tourism.
In 2017, CPI inflation is forecasted to reach 1.7% as activity continues to expand and international oil and food prices continue to rebound. The projected inflation rate in 2017 also reflects base effects due to the relatively low general price level registered in 2016.
