Cyprus GDP growth slashed after Ukraine war

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The University of Cyprus downgraded its projection for economic GDP growth this year to 2.6% due to the Russian invasion of Ukraine, warning of potential deterioration in asset quality in the banking system due to rising inflation.

In the UCY Economic Research Centre outlook for May, real GDP growth is estimated at 2.6%, 1.5 percentage points lower than its January forecast.

In 2023, real GDP growth is estimated to bounce back to 3.1%.

“Russia’s invasion of Ukraine and sanctions on Russia have weakened the outlook for Cyprus, mainly as a result of the expected collapse of tourist arrivals from Russia and Ukraine, rising international commodity prices, weaker economic sentiment and less favourable financial conditions,” the outlook said.

The ERC cautioned: “The war in Ukraine and sanctions against Russia could impact activity in Cyprus more adversely than indicated by the current forecasts.

“Moreover, the continuation of the war and tighter EU sanctions against Russia may weigh on growth prospects primarily through higher fuel, food and raw material prices.”

UCY economists said new COVID-19 waves continue to pose significant downside risks to the outlook through new containment measures and supply bottlenecks that exert upward pressures on prices.

“Additional policy support may be needed because of the war in Ukraine, rising energy prices and the continuation of the pandemic.”

ERC said, pointing to fiscal challenges of high public debt and monetary tightening may cloud the outlook.

In response to high inflation, tightening financial conditions could negatively affect bank asset quality, creating risks to the outlook.

According to the ERC, inflation (CPI) is projected to reach 4.8% in 2022 and decline to 2.2% in 2023, revising its previous forecast by 2.2 percentage points for this year.

“Russia’s invasion of Ukraine and sanctions on Russia have intensified inflationary pressures through increases in international commodity prices, especially fuel and food prices.”