Cyprus’ economy will be the fifth best in the European Union with a 2023 GDP growth rate of 1.6%, according to the European Commission’s Winter interim Forecast.
Only Ireland (4.9%), Malta (3.2%), Romania (2.5%) and Luxembourg (1.7%) are expected to do better this year as growth across the bloc slows.
Generally, the EU economy is set to avoid recession in 2023, but headwinds to development persist, said Commissioner for the Economy Paolo Gentiloni.
In Cyprus, real GDP continued its solid growth momentum, increasing by 6.1% in the first three quarters of 2022 compared to the same period in the previous year.
Despite rising inflation, private consumption remained robust, supported by increased employment and wages, underpinned by targeted government measures to compensate for high energy prices.
Tourism also played a role as arrivals regained lost ground during the pandemic and reached 80% of 2019 levels.
In addition, exports of business services increased significantly.
On an annual basis, real GDP growth is estimated to have increased by 5.8% in 2022.
Economic sentiment among consumers and businesses slightly improved in January.
The improved economic outlook among Cyprus’ trading partners is set to further support tourism, which is expected almost to reach 2019 record levels.
The 50% wage indexation, implemented in January 2023, is expected to support somewhat purchasing power.
However, increasing interest rates are set to negatively affect corporate investments and residential construction.
Elevated prices and tightening monetary policy are expected to weigh on real GDP growth, which is forecast to slow down to 1.6% in 2023 before accelerating to 2.1% in 2024.
HICP inflation reached 8.1% in 2022, fuelled by high energy prices and supply bottlenecks.
Inflation is projected to decrease over the forecast horizon as falling gas and oil prices ease energy inflation and supply disruptions attenuate further.
By contrast, wage indexation is expected to exert upward pressure on core inflation.
Overall, HICP inflation is set to moderate to 4% this year and 2.5% in 2024.
On an EU level, the Commission notes that almost one year after Russia launched its war of aggression against Ukraine, the EU economy entered 2023 on a better footing than projected in autumn.
The Winter interim Forecast lifts the growth outlook for this year to 0.8% in the EU and 0.9% in the euro area.
Both areas are now set to narrowly avoid the technical recession that was anticipated for the turn of the year.
The forecast also slightly lowers the projections for inflation for both 2023 and 2024.
The winter economic forecast shows the resilience of the Cypriot economy, said the Finance Ministry, adding that for 2023 Cyprus is among the top four Euro area countries with the highest growth rate which is double compared with the EU average.
It said that projections on real GDP growth both for 2023 and 2024 are higher than the respective projections of the autumn forecast.
“Although some deceleration in economic growth is expected for 2023, this has been reduced from 1% in the autumn forecasts to 1.6%.”
For 2024 the Commission projects an acceleration in economic growth estimated at 2.1% compared with 1.9% under the autumn forecast.
Cyprus is among the top four countries with the highest growth rates in the Euro area, which is double the Euro area and EU average amounting to 0.8% and 0.9%, respectively, which “shows the economy’s resilience and capacity to adapt”.
The ministry also highlighted the Commission also raised its projection for growth throughout 2022 by 2 basis points to 5.8% of GDP.