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Strong economic recovery not a given

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Cyprus’ economy will start to recover in 2021, however, at a much slower pace than the government predicts with everything riding on the speed of the COVID-19 vaccination rollout, analysts told the Financial Mirror.

Economists warn that 2021 will not be the year when Cyprus makes up for lost ground during the pandemic that saw two national lockdowns in 10 months.

Finance Minister Constantinos Petrides predicts the Cyprus economy will bounce back from the pandemic with 4.5% GDP growth following a 5.5% contraction last year.

Admitting that the country’s unemployment rate is currently high at 8%, he said it is expected to drop to 7% within the year.

He acknowledges that Cyprus public finances are not at their best with public debt expected to rise to 120% of GDP, up from 95% in 2019.

However, analysts believe the recovery will be a much slower process while reaching pre-coronavirus levels will take a few years.

The Economic Research Centre of the University of Cyprus Economic Outlook said 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%.

A Bloomberg outlook has the Cypriot economy recovering in 2021 with GDP growth projected at a median 4.2% from a contraction in 2020 of 5.7%, not much lower than the government’s more optimistic 4.5% rebound.

Gloomier forecast

However, one of the five forecasters in the Bloomberg sample, Cyprus-based Sapienta Economics has a much gloomier forecast, projecting a much smaller recovery this year.

Sapienta Economics estimates a milder 5.2% contraction of the economy but sees a much lower 1.4% rebound.

“A median of 4.2% for 2021 means that others have extremely high and, I believe, outdated expectations for the economy this year,” said the agency’s Director Fiona Mullen.

She said the deadlier COVID-19 second wave does not allow for much optimism.

“It is almost February and we are still in lockdown, which is affecting consumer spending – the biggest portion of GDP,” said Mullen.

The economist argued that our top three tourism markets (UK, Russian Israel) all require quarantine or self-isolation either on the way into Cyprus or the way out or both.

“Adding to this, there are concerns about how fast the global production of vaccines can lead to a loosening of lockdowns and a revival of air travel generally before the Easter season starts.”

Mullen to 4.2% GDP growth this year, which is the median, would need good quarterly growth in the last quarter of 2020 and quarter-on-quarter growth rates exceeding 0.4% on average in 2021.

“I would love to be proven wrong, but I am sceptical that this can be achieved when the outlook remains so uncertain.

“The one thing that could overturn the situation is if air travel opens without restrictions by Easter. In that case, I think we will see a bonanza of travel – both outbound travel, which in the statistics detracts from GDP – and inbound travel.”

She said, in the short term, Cyprus should focus on the vaccine.

“In the longer term, I hope that members of parliament understand that the EU funds for the ‘green and digital transition’ present a once in a lifetime opportunity to drag the economy into the 21st century.

“If used wisely, they will be transformative.”

More positive

Ioannis Tirkides, Economic Research Manager at Bank of Cyprus, said growth may not reach the government’s 4.5% estimate, but it will be somewhere near to it.

“I find that the economy will return to growth in 2021, at a pace of between 3 and 4% compared with a decline of 5.5% we estimate for 2020.

“We must have in mind that inflation will remain low, and the government budget will remain in deficit perhaps for longer than we can now anticipate,” said Tirkides.

He argued that economists need to get a grasp of what really happened in 2020.

“Tourism collapsed and related sectors also dropped steeply.

“However, the total contraction that took place was considerably smaller than initially feared and better than European averages and certainly better than in southern countries”.

Tirkides attributed this to a massive fiscal stimulus and a longer and broader loan moratorium than many other countries.

“Consumption spending was sustained. Household consumption in fact, at least for the nine months we have actual data, was growth neutral, which was not the case in any other country with only a few exceptions.

“At the same time, government consumption spiked making a significant growth contribution more than anywhere else in the EU.”

He argued this combination of policies will not be repeated to the same degree in 2021.

“It will be interesting to see how recovery in the tourism sector plays out, but at this point, the fear is we may lose most of the year because of the slow vaccine rollout and other epidemiological challenges, such as new strains and the efficacy of vaccines”.

Jobs at risk

Marios Christou, Associate Lecturer of University of Nicosia’s School of Business, said his final estimate for 2020 economic contraction was 5.1%, “far off from the 10% plus initially estimated”.

“So, it could be a bit risky to make forecasts on how this year will go, as there are still uncertainties revolving around the rollout of the vaccination programs across the world and Cyprus.

“Vaccinations are the key to jump-starting the tourism sector.”

He was more concerned about the aftermath of the pandemic, noting that economists fear there could be an implosion of the Cypriot banking system’s exposure to a growing Non-Performing Loans.

“The European Central Bank has estimated that the NPLs in the Eurozone will increase by €1.4 trl this year alone.

“We will definitely see a significant increase of NPLs in Cyprus as a large number of businesses and households will be worse off financially, following the pandemic,” said Christou.

There is also uncertainty over how the economy will be rebound.

“Many people have lost their jobs in the pandemic. Currently, there is no visibility on when and how these people will rejoin the active workforce.”

He said hundreds of jobs could be lost for good as businesses restructure operations.

“Will they be returning to their offices or will remote working gain points?”

Christou argued that Cyprus, just like a majority of countries will face social restructuring issues.

“We could see some turbulence in the social continuity of our society. On the one hand, we have employees, mainly civil servants, who have not been severely affected.

“While many people have been unemployed for two years, as staff at hotels who have not worked since November 2019.”