Cyprus’ GDP growth will slow considerably as the war in Ukraine pushes inflation to unprecedented heights, according to the European Commission.
In its Spring forecasts on Monday, the European Commission revised its outlook for the Cypriot economy for 2022, forecasting 2.3% GDP growth for the year, just over half the 4.1% calculated in February before Russia invaded Ukraine.
“The Cypriot economy started 2022 on a strong footing, but Russia’s invasion of Ukraine and the related sanctions are expected to impact economic activity, especially tourism and services exports, as Russia is an important market for both,” the Commission said in its forecast.
Brussels warned its estimates are subject to significant uncertainty and downside risks, “as the tourism and export-related services sectors are particularly vulnerable to external shocks”.
It estimates that Cyprus and the EU will witness a large increase in inflation, driven upwards by energy prices.
The Commission said headline inflation (HICP) would register a considerable increase of 5.2% in 2022, doubling its previous projection of 2.6%.
It’s projected to decline to 2.7% next year, significantly higher than the previous estimate.
“This is mainly due to exceptionally high oil prices, as Cyprus depends heavily on oil products.
“The prices of non-energy industrial products and food have also increased as a result of supply chain disruptions and the secondary impact from higher energy prices.”
Cyprus witnessed its highest inflation rate for four decades in April, at nearly 9%, while consumer associations fear that the worst is yet to come.
According to the Cyprus Statistical Service, inflation jumped to 8.8% in April from 7.13% in March.
This is the highest inflation hike recorded since February 1982, when inflation reached 9.1%.
Unemployment is forecast to reach 7.8% from 7.5% in 2021 before declining in 2023 to 7.3%.
“Employment and vacancies were on the rise at the end of 2021, whereas the slowdown of economic activity is set to put the brakes on the labour market later this year,” the outlook said.
Furthermore, despite the economic slowdown, the Commission projects that Cyprus’ fiscal deficit will continue to improve as the government phases out its pandemic-related support measures.
In 2022, the deficit is expected to improve to 0.3% of GDP and will improve marginally to 0.2% in 2023.
After declining to 103.6% of GDP in 2021 on the back of high nominal GDP growth and cash reserves accumulated in the previous year, public debt is expected to decrease to 93.9% and 88.8% in 2022 and 2023 respectively.
