Falling unemployment, a construction revival and strong tourism figures will ensure robust Cyprus GDP growth of 3.9% in 2018, 3.5% next year and 2.9% in 2020, said the European Commission autumn forecast.
According to the forecast presented by Commissioner Pierre Moscovici, Cyprus public debt will decline from 105% in 2018 to 98.4% in 2019 and 91% in 2020. The budget will have a surplus of 2.8% this year, +3% in 2019 +2.9% while inflation will reach 0.8%, 1.3% and 1.4% over the same period.
The Commission also predicts a sharp decline in the unemployment rate from 8.2% in 2018 to 6.3% in 2019 and 4.8% in 2020.
"Risks to the fiscal outlook are tilted to the downside, linked to the uncertainties on the potential 2018 deficit-increasing impact and contingent liabilities from the banking sector, the possible introduction of new taxation reforms in 2019 and the potential additional costs of the national health system reform," said the forecast.
According to the EC "economic activity is forecast to remain strong, driven by domestic demand, unemployment is expected to continue its rapid decline, while headline inflation is projected to pick up only moderately…"
"Growth is expected to become more domestic demand-driven. Private consumption accelerated in the first half of the year and is expected to remain fairly strong, as unemployment keeps rapidly declining, wages gradually increased, and inflation remains low, further supporting real incomes.”
It said private investment is set to remain buoyant, reflecting the upbeat business sentiment and the many large-scale projects already in the construction phase.
“Public consumption and investment are also in the recovery mode,” said the report.
Exports are expected to continue performing strongly in 2018, due to the sizable ship de- registration in the first quarter of the year (which statistically had the effect of increasing goods exports), but to weaken thereafter.
But the report said the tourism would come under more pressure as the competition hots up.
"It is now confronted with increasing competition from neighbouring countries, where safety concerns are abating, and the lower purchasing power of some tourists (predominantly British and Russian) as a result of currency depreciations.”
Meanwhile imports, due to their significant content in final demand, are projected to outweigh exports, thus leading to an overall negative contribution of net exports to real GDP growth, and to a further widening of the current account deficit, said the Commission.
According to the Commission, positive labour market dynamics, with a rapid employment expansion since 2016, have continued, bringing the unemployment rate down to 8.1% by mid-2018, the lowest level in eight years.
The strong expansion of the economy, and in particular the construction sector, provided employment opportunities also for the most vulnerable groups – young and long-term unemployed – reducing their unemployment rates to 19% and 2.5%, respectively.
Employment expectations in key sectors are positive, signalling a bright outlook in the short term. Wage growth has remained contained, but recent increases in public wages and diminishing slack in the economy are expected to encourage wage rises in the private sector as well.
“The government’s fiscal performance remains remarkably strong, with the primary surplus being among the highest in the euro area.”
The budget surplus is expected to increase and remain high over the forecast horizon, although the projection for 2018 does not yet include the potential deficit-increasing impact of banking support measures related to the Cyprus Cooperative Bank (CCB).
The general government surplus is forecast to improve to 2.8% of GDP in 2018.
“Buoyant tax revenue growth underpinned by strong underlying economic growth will outpace government expenditure growth.”
In particular, taxes on products are projected to benefit from strong consumption, while income taxes and social contributions are expected to be supported by improving labour market conditions.
Expenditure is projected to increase somewhat at a slower pace than revenues, mainly due to public sector pay rises and social transfers.