UCY projects lower 3.7% GDP growth than government

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According to a new outlook, the Cypriot economy is expected to recover in 2021 with GDP growth projected at 3.7% from a pandemic-induced contraction in 2020 of 5.7%, this is lower than the government’s more optimistic 4.5% rebound.

The University of Cyprus Economic Outlook issued by its Economic Research Centre conflicts with the government’s early forecast of a 5.5% contraction in 2020 and 4.5% GDP growth this year.

In its outlook for February, ERC says that the contraction of GDP in 2020 is estimated to be smaller than it previously forecast due to the stronger-than-anticipated rebound in economic activity in Cyprus and abroad, following the lockdowns in the spring.

In 2021, the Cypriot economy is expected to recover as real GDP growth is projected at 3.7%, growth is revised downwards due to the resurgence of the pandemic in the last quarter of 2020 and the second lockdown.

“The balance of risks to the outlook is tilted to the downside. Downside risks arise from the introduction of stricter measures to curb the spread of the pandemic, especially the new lockdown in January.

“Additional risks stem from delays in the vaccine rollout and vaccinations in Cyprus and the EU, as well as from a new wave of infections due to new variants of the virus,” said the study.

It says that slower-than-anticipated progress with vaccinations and/or a new surge in infections will cause setbacks to the reopening of economic sectors and slow down the recovery of domestic activity and external demand, particularly demand for tourist services.

Other risks relate to pressures on public finances and a possible re-escalation in NPLs as the pandemic persists.

“Further delays in the implementation of overdue structural reforms (e.g., the judicial system, public administration, local authorities) may undermine the country’s credibility, limit access to EU funds and weigh on the growth prospects.”

CPI inflation is projected to rise to 0.8% from -0,6% in 2020 as the economy recovers.

“In 2021, CPI inflation is projected at 0.8%, a downward revision by 0.2 percentage point compared to the November issue. The downward revision is largely driven by the recent negative inflation rates in Cyprus and the absence of upward pressures on international oil prices in 2020.”

Last year was marked by the outbreak of the COVID-19 pandemic and the containment measures taken globally, including in Cyprus, leading to an unprecedented contraction of economic activity, particularly in the second quarter of 2020.

It notes that the gradual relaxation of the containment measures in Cyprus, which started in May, led to a rebound in activity in the third quarter of 2020; nevertheless, output remained below its level in the same quarter of 2019.

The year-on-year (y-o-y) contraction of real GDP in Cyprus decelerated to 4.4% in the third quarter of 2020 from 12.3% in the second quarter.

The ERC said its GDP forecast for 2020 is less pessimistic than the projections published by the Central Bank (baseline scenario) and the European Commission (-6.2%).

The growth forecast for 2021 is along the same lines of the European Commission and slightly lower than the baseline projection by the Central Bank (4.1%).

But they are less optimistic than the GDP estimates given by Finance Minister Constantinos Petrides last week.

Any forecast depends on the evolution of the pandemic in combination with the availability of vaccines and the vaccination rollout in Cyprus and Europe.