The European Commission has praised the Cypriot economy for exceeding expectations during the year’s first quarter while also delivering bad news regarding high inflation.
“The Cypriot economy surprised on the upside in the first quarter of 2022, mainly as a result of the faster-than-expected recovery of tourism and the continuing expansion of exports of other services, notably business services and IT,” the Commission said in its Summer forecast.
The report said that tourist arrivals and revenues rose considerably in the opening months of 2022, reaching approximately 75% of their pre-pandemic levels.
It noted that the sector’s prospects remain positive, despite the substantial loss of Russian tourists, which is traditionally one of the island’s largest markets.
Therefore, Brussels has revised its forecast upwards for real GDP in 2022 to 3.2%, almost a percentage point higher than in the spring forecast.
Estimates real GDP growth is 2.1 % for 2023, revising it down from 3.5%.
The main drivers of growth are expected to be domestic demand and, to a lesser extent, net exports of services.
There was a marginal downgrade of growth for the eurozone to 2.6% from 2.7% forecast in May, while for the EU as a whole, the forecast was 2.7% and remained unchanged.
Cyprus investments, especially in the construction sector, are expected to be affected by the gradual tightening of economic conditions, disruptions in the supply chain and extremely high prices of building materials.
On a positive note, the European Commission said implementing the Cyprus Recovery and Resilience Plan is expected to support investments.
It warned that dented consumer confidence, in conjunction with rising inflation and higher interest rates, will shackle the economy in the second half of the year.
Private consumption is expected to be negatively affected by high inflation and the erosion of purchasing power.
However, household income is supported by the measures taken by the government to deal with high energy prices and the partial indexation of wages to be implemented in January 2023.
Finance Minister Constantinos Petrides welcomed the news that Cyprus is among the countries with the third largest upward revision in 2022 and is above the EU and eurozone averages.
“It demonstrates the strong fiscal position with which it started the year, its resilience but also the ability to adapt to difficult economic conditions.”
The Commission said Cyprus will end the year with inflation at 7% before falling to a more manageable 3.3% in 2023.
The bloc’s forecast is less optimistic than the Finance Ministry’s, which expects the year to close with a 4.5% inflation rate.
Eurozone inflation was revised upwards to 7.6% from 6.8% predicted in May, while for the EU, it was 8.3% from 8.4% predicted in May.