* Recession milder but downside risks remain, GDP at -2.8% for 2014 *
The recession in Cyprus has been milder than anticipated this year and a modest economic recovery is expected to begin in 2015 and strengthen in 2016 in line with the rest of the EU, the European Commission's autumn forecast said on Tuesday.
Presenting the projections for Cyprus, Jyrki Kataine, Vice-President in charge of Jobs, Growth, Investment and Competitiveness and Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs said that Cyprus’ public finances are forecast to improve significantly, as a result of the government's efforts and the improvement in the economy. Reflecting weak domestic cost pressure, inflation will be close to zero in 2014, but should increase gradually, they said.
Government spokesman Nikos Christodoulides said the government was satisfied with the EC predictions for the next year and reiterated the administration’s determination to continue with the strict implementation of the programme of reforms for the complete restoration of the Cypriot.
“The recession has completed its cycle, unemployment is on a declining course after several years, the public finances are under control and we can now look to the future with optimism,” Christodoulides said.
“This is also demonstrated by the relevant predictions of the Commission which refer to the positive rates of growth of the Cypriot economy for the next year,” he added.
Christodoulides said these predictions are seen as a continuation of the recent sovereign upgrades by rating agencies, but also of the successful results of the stress tests of the island’s four systemic banks.
RECESSION MILDER
According to the EC autumn forecast, economic activity in Cyprus continued to decline in the first half of 2014, falling by 3.0% compared to the first half of last year. Although significant, the contraction has proved milder than anticipated in the Spring forecast. However, increasingly high unemployment, wage cuts, and tight credit conditions continued to weigh on domestic demand. Import contraction decelerated in the first half and net trade contributed negatively to growth, the report said.
After a sharp decline at the beginning this year due to subdued domestic cost pressures and falling wages, HICP inflation returned to positive territory in the second half, mainly due to increasing prices of goods and services consumed by tourists. The labour market is showing signs of stabilisation. Unemployment dropped below 16% in the first half of 2014, although this is partly because of a contraction of the labour force.
CONTRACTION TO MODERATE
The EC forecast said that modest improvement in business and consumer confidence indicators and most available hard indicators, such as tourist arrivals and retail sales, suggest that the contraction in the second half of 2014 will be smaller than in the first part of the year. While domestic demand is expected to decline further, a positive contribution to growth is expected from net trade. As a result, real GDP is forecast to contract by 2.8% for 2014 as a whole, substantially less than previously anticipated.
Unemployment is expected to average 16.2% for 2014 as a whole, following a further increase in the second half. Moderate inflation in the second half should also offset the sharp decline in the first half, leaving HICP inflation close to zero for 2014 as a whole.
MODEST RECOVERY IN 2015
In 2015 and 2016, the economy is expected to gradually regain momentum, mainly driven by net export. Private consumption will remain subdued, reflecting weak wage growth and deleveraging from indebted borrowers. While the restoration of a sound and well-capitalised banking sector should gradually remove impediments to growth and allow for a gradual easing of the tight credit conditions, recovery is initially expected to remain largely credit-less and led by less leveraged sectors such as professional business services, and sectors with more solid turnover, such as tourism.
Supported by improved competitiveness and a gradual increase in global demand, export growth is expected to be relatively strong and to become the main driver of growth in 2015-2016. In line with the expected recovery, unemployment should gradually decline, while HICP inflation is forecast to increase modestly.
RUSSIA FACTOR A RISK
Risks are tilted to the downside, the EC autumn forecast said. On the domestic front, a more protracted period of tight credit conditions, as well as a deeper and more prolonged period of deleveraging, could weigh on domestic demand.
On the external front, sanctions against Russia could hurt growth to a larger extent than expected, both through the depreciation of the Russian rouble and through possible disruptions in the flow of tourists.
TAX COLLECTION TO IMPROVE
In 2014, the general government headline and primary balance are projected to improve sharply by about 2% of GDP, despite the on-going recession. Revenue is expected to increase compared to 2013, driven by consolidation measures particularly on social contributions and taxes on production and imports, high dividends from the Central Bank of Cyprus and improved tax collection. Together, these factors should more than offset the negative impact of slowing economic activity on the collection of taxes on income and wealth.
Total expenditure is expected to remain on a decreasing path, despite an adverse impact due to called government guarantees. This largely reflects tight expenditure control, measures under Cyprus’ economic adjustment programme to reduce the public sector wage bill, and a moderation of early retirements in the public sector, which reduced the cost of lump-sum pension payments.
The general government deficit is expected to stabilise in 2015 and to decrease significantly in 2016.
The projections include dividend income from the Central Bank of Cyprus (CBC) expected to amount to about 0.6% of GDP in both 2015 and 2016, to be distributed in line with the CBC's duties under the Treaties and the ESCB and ECB Statute.
Cyprus' debt-to-GDP ratio is expected to peak in 2015 at about 115% and to decline afterwards, supported by the economic recovery and the fiscal performance. Compared to the previous forecast, the debt-to-GDP ratio is positively affected by the upward revision of nominal GDP by about 10% due to the transition to ESA2010 and other statistical benchmark revisions.
