ECONOMY: EU sees Cyprus growth momentum tailing off

2 mins read

Growth momentum is slowing down in Cyprus, according to the headline assessment of the European Commission’s Autumn Economic Forecast.

According to the forecast, GDP growth is projected at 2.9% for 2019, 2.6% for 2020 and 2.3% for 2021.

It predicts unemployment will continue declining from 7.2% in 2019 to 6.3% in 2020 and 5.7% in 2021 and public debt will fall from 93.8% in 2019 to 87.8% in 2020 and 81.8% in 2021.

Inflation will be 0.6% in 2019, 0.7% in 2020 and 1.3% in 2021 and the government budget surplus will remain high at 3.7%, 2.6% and 2.4% for the three years.

The European Commission said, "risks to the fiscal outlook are on the downside" while "key risks include the court cases that could lead to the reversal of civil service pay cuts implemented during the crisis as well as the potential deficit of public healthcare providers during the first years of the NHIS".

Brussels forecasts that "Cyprus’ economic expansion remains strong but is set to gradually moderate, mainly due to external headwinds".

It notes that "domestic demand is projected to stay the main driver of growth, supported by private consumption and an improving labour market. Meanwhile inflation should remain subdued".

After reaching 4.1% in 2018, real GDP growth slowed down in the first half of this year.

"The weakness came mainly from the external environment, while domestic demand held up well. Private consumption should continue to provide strong support for growth as real disposable income continues to rise.”

The forecast said investment has been strong in construction largely from the Citizenship by Investment scheme, which has brought in substantial foreign direct investment (FDI).

“The tighter requirements of the Scheme caused a frontloading of applications, thus also FDI in the first half of the year before their entry into force; hence, a deceleration in the second half of the year is expected."

Tourism saw a fall in revenues, driven by several factors: tourists from the UK suffered from the depreciation of the pound sterling versus the euro.

Competition from cheaper neighbouring destinations led to a decline in Russian tourist arrivals (the second largest market).

Persisting air access problems led to a contraction of German arrivals by nearly one fifth.

The general government headline balance is expected to record a hefty surplus of around 3.7% of GDP in 2019, after a temporary deficit of 4.4% of GDP in 2018 that was due to the one-off support measures related to the Cyprus Cooperative Bank sale.

"Cyprus’ fiscal performance is projected to remain strong, on the back of a still relatively strong GDP growth and improving labour market.”

Government revenue is forecast to increase strongly in 2019 and in the next two years driven by strong tax collection and by a sizable rise in social security contributions due to higher contribution rates and to the introduction of the National Health Insurance System (NHIS).

"Following a significant increase in government debt in 2018, due to the one-off government support to the banking sector, the debt-to-GDP ratio is projected to fall to 93.8% in 2019, to 87.8% in 2020 and to 81.8% in 2021".

The decrease is mainly due to projected primary budget surpluses, strong GDP growth and active debt management. Cyprus repaid in advance the Russian loan in September 2019 and plans to repay early the IMF loan in 2020.