The growth momentum of the Cypriot economy is expected to moderate in 2019 and 2020, with real GDP growth projected to slow from 3.9% last year to 3.4% this year and to remain unchanged at 3.4% in 2020, according to the July Economic Outlook published by the Economics Research Centre of the University of Cyprus.
“The forecast for real GDP growth for 2019 has been revised marginally from 3.5% in the May issue to 3.4%, mainly as a result of deceleration in domestic activity growth in the first quarter of the year,” the UCy monthly outlook said.
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The forecasts suggest that real activity in Cyprus will continue to increase at robust rates in 2019 and 2020, albeit at a slower pace vis-à-vis 2018. The GDP growth forecast for 2019 presented here is in line with the projection published by the Central Bank (3.5%), but higher than the growth forecast given by the European Commission (2.9%). The growth forecast for 2020 is more optimistic than the projections released by the Central Bank (3.1%) and the European Commission (2.6%).
The outlook is forecast to remain favourable, according to the UCy projection, due to domestic and external factors, such as robust activity and employment growth in Cyprus in the previous quarters, higher-than expected growth in the euro area and the UK in the first quarter of 2019, supportive external financial conditions, low inflation, strong fiscal performance in Cyprus, and further progress in the domestic banking sector.
Recent developments in business and consumer survey data reflect lower expectations of activity growth in the euro area and the UK, as well as the absence of broad-based confidence gains in Cyprus, weakening the growth momentum in the following quarters.
Downside risks to the projections may stem from slower progress with private sector deleveraging and slower progress with the reduction of non-performing loans (NPLs).
Echoing concerns that new legislation in parliament will hamper banks’ profitability, raising the risk of state support, the UCy report said that “the newly proposed changes to the law on foreclosures are expected to cause delays in the foreclosure procedures and limit the effectiveness of the legal tools. Such amendments may intensify downside risks to the outlook by renewing instability in the banking system, undermining Cyprus’ credibility, denting investor and depositor confidence, and weakening repayment discipline.”
The high level of public debt together with the strong link between bank and sovereign risk, poses risks to the outlook, especially if amendments to the law on foreclosures similar to those recently proposed are enacted, the UCy report added.
Also, upward pressures on public expenditure (e.g. from the public sector wage bill and/or the newly introduced General Health System) may weaken the outlook. Downside risks could arise from higher uncertainty surrounding the UK’s exit from the EU, weaker-than-expected growth in the UK and the euro area, and geopolitical tensions in the Eastern Mediterranean.
Upside risks to the outlook are associated with a higher degree of materialisation of investment plans (e.g. investments relating to tourism, property developments, shipping) than that reflected in the predictors.
The July economic outlook added that the CPI inflation forecast for 2019 has been revised marginally from 0.8% to 0.7%, and the inflation forecast for 2020 has been revised from 2.4% to 1.8%. The downward revisions are mainly driven by further deceleration in inflation in the second quarter of 2019, and subdued international oil prices.
