Inflation forecast at 8.6%, GDP growth 4.9% in 2022

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Consumer Price inflation is forecast at 8.6% for 2022, slipping to 3.4% in 2023, while GDP growth this year is projected at 4.9%, followed by a lower 2.4%, the University of Cyprus Εconomics Research Centre predicts.

Its economic October outlook notes that real GDP growth in 2022 is projected at 4.9%, up by 2.0 percentage points compared to the forecast in July.

The upward revision resulted from strong activity growth in the second quarter and robust demand during the third quarter, especially for tourist services.

“However, the negative effects of the ongoing war in Ukraine on economic activity appear to be unfolding more slowly than previously thought, impacting the outlook for 2023,” said the outlook.

Real GDP growth in 2023 is forecast at 2.4%, down by 0.4 percentage points from the previous forecast.

“The downward revision was driven by several factors, including sustained upward price pressures, the deterioration of economic sentiment in the EU, the weakening of Cyprus’ business confidence in services, and the uptick of lending interest rates in the euro area.

“The risks to the growth outlook are currently on the downside.

“As monetary and fiscal policies normalise, the adverse effects of the ongoing war in Ukraine on activity may build up.”

It said an escalation of Russia’s war in Ukraine could amplify upward pressures on commodity prices, prolong high inflation and deepen the energy crisis in Europe, increasing the cost of living further and negatively affecting growth.

“Lower-than-projected growth rates in Cyprus may arise if the EU and the UK slowdown is more severe than expected.

“Tightening monetary policy may pose risks to the domestic outlook if the increases in sovereign borrowing costs and debt servicing costs for firms and households are steeper than anticipated.

“In view of the tightening financial conditions, universal (instead of targeted) fiscal measures to counter the effects of high inflation may undermine the fiscal position and cloud the growth prospects.”

UCY economists said a new COVID-19 outbreak might hamper economic activity through possible containment measures and renewed supply chain disruptions.

“The inflation outlook is mainly driven by the recent acceleration of inflation due to strong increases in international energy and food prices in combination with robust economic activity.

“The depreciation of the euro against the US dollar and upward revisions in selling price expectations in services has also influenced the inflation outlook.”