The Central Bank of Cyprus (CBC) has marginally pushed up its projections for GDP growth this year citing the slightly improved prospects in the external economic environment and the anticipated lower energy prices.
According to its spring report, the Central Bank expects the GDP growth rate for 2023 to rise to 2.6%, compared to a significant increase of 5.6% in 2022. The CBC’s prediction for 2023 is 0.1% higher than its December forecast.
As the authority noted, the slowdown is due to the fragile external environment because of the negative effects of the ongoing war in Ukraine, the expected slow correction of domestic inflationary pressures and partly due to rising interest rates.
The CBC emphasised that its latest forecast report was completed in early March before the recent emergence of tensions in the financial markets, referring to the collapse of two major banks in the US and the rescue of troubled Credit Suisse.
“These tensions may negatively affect the outlook for economic growth and inflation, through the effects of these tensions on the external environment, which remains fragile,” it noted.
CBC’s medium-term forecast for the main macroeconomic indicators of Cyprus for 2023-2025 summarise the forecasts for gross domestic product (GDP), unemployment, inflation and inflation excluding energy and food (structural inflation).
Upside risks
As regards inflation, the central bank highlights that upside risks mainly stem from larger or more persistent lagged effects from higher energy prices in 2022.
For the years 2024 and 2025 in particular, a possible wage-price spiral, coupled with higher long-term inflation expectations, are the main upside risk, according to the CBC.
An economic growth of around 3.1% per year is expected for the period 2024-2025.
The forecast regarding GDP growth is based mainly on the recovery of domestic demand and, to a lesser extent, net exports, in the context of the continued inflow of foreign tech firms, as the projected recovery of tourism receipts to pre-pandemic levels.
According to the CBC report, unemployment for 2023 is estimated to decline to 6.6% this year and will decline further to 5.9% and 5.5% in 2024 and 2025, respectively, edging closer to full employment.
Inflation based on the harmonised index of consumer prices (HICP) is estimated to drop to 3.3% this year from 8.1% in 2022 and will decline further to 2.3% and 1.9% in 2024 and 2025.
