COVID19: Cyprus economy to suffer ‘severe contraction’ in 2020

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University of Cyprus economists expect the country’s coronavirus-stricken economy to shrink by 6.9% of GDP in 2020 under a baseline scenario and contract 13.1% under more adverse conditions.

UCY Economics Research Centre in its May outlook said economic activity will shrink significantly this year as a result of the COVID-19 pandemic.

Real GDP is projected to decline by 6.9% in 2020 below the baseline scenario. In the worst-case scenario, which assumes a longer adjustment period and a larger decline in external demand, the real GDP is expected to plunge 13.1%.

In the report notes that in 2019, real GDP in Cyprus increased by 3.2%, marking the fifth consecutive year of strong growth.

However, the COVID-19 outbreak and the unprecedented lockdown have severely disrupted economic activity globally, including Cyprus.

“The outbreak of the pandemic in   Cyprus and the containment measures that followed could be viewed as an exogenous shock to the economy that has primarily affected supply; the shock, however, could gradually impact demand,” notes the report.

The projection incorporates the direct impact of lockdown in Cyprus, thereby reducing the production capacity in sectors of economic activity; the impact of the pandemic relating to reduced capacity utilization due to measures/restrictions, which will remain in place after the relaxation of the initial containment measures and the impact of reduced external demand, especially for tourist services.

The scenarios differ with respect to the adjustment period experienced in each sector, following the complete lifting of lockdown measures in each sector and the evolution of external demand.

During the adjustment period, “sectors are assumed to operate below their normal capacity due to supply and demand constraints.”
These constraints are caused by measures such as social distancing, increased hygiene protocols, disruptions in the supply chain, and travel restrictions

The baseline scenario assumes an adjustment period of two months and a reduction in external demand for tourist services in Cyprus from April to August, translating into a decrease of 40% in annual tourist arrivals.

A worst-case scenario for tourism is external demand decreasing 80% between April-December.

Retail trade, transportation, accommodation and food service activities and the sector of arts, entertainment, recreation and other service activities are associated with the largest output losses, amounting to around 20% of their gross value added.

Significant output losses are also estimated for construction, manufacturing, as well as administrative and support service activities.

“In the adverse scenario, which assumes a longer adjustment period and a sharp reduction in external demand, the contraction in real GDP could be as severe as 13.1%,” said the outlook.

“The response of economic activity  to  the COVID-19  crisis does  not  only  depend on mitigating     economic policies and the economic fundamentals of the country but also on the epidemiological outcomes in Cyprus and abroad in the following months.”