Economic recession is expected to be milder in 2015, according to the University of Cyprus Economics Research Centre’s monthly outlook for January that refers to the negative risks for the economy such as the high level of non-perform,ing loans (NPLs) in the banking sector, delay in reforms and the impact from the Russian economy.
However, the ERC, that is tasked with producing the monthly business and consumer confidence index, also refers to the possible benefits from last week’s ECB decision for quantitative easing, UK growth and investments in tourism.
The European Central Bank finally agreed to embark on a major equity buying scheme in May that would mean investing in about 120 mln euros worth of Cyprus bonds, conditional to the island keeping up with the economic adjustment programme set out by the Troik of international lenders.
The ERC report said added that real GDP growth for 2014 is projected at -2.2% as the decline in real economic activity in the fourth quarter (y-o-y) is estimated at 1.4%.
The recession is forecasted to persist in 2015, but the contraction of real output is estimated to decelerate considerably, it said, with real GDP growth forecast at -0.4%.
Real GDP is expected to decline by 1%, 0.6% and 0.3% in the first, second and third quarters of 2015, respectively, and rise by 0.3% in the fourth quarter, compared to the same quarter of 2014.
The UCy report said that the deceleration of the recession is driven by the slowdown of the contraction of domestic activity and employment; stable/decreasing domestic prices coupled with declining international oil prices; strengthening of domestic economic confidence and the favourable performance of the Cyprus Stock Exchange in 2014; further strengthening of stabilisation trends in the banking system; and, external factors, such as the expansion of real activity in the euro area and the U.K. during the third quarter, and the weakening of the euro against the British pound, which is expected to influence positively domestic activity and tourism.
Some recent developments, however, could weigh on activity in Cyprus in certain sectors, hindering earlier and stronger recovery.
These include uncertainties about the euro area recovery reflected by the historically low levels of European interest rates, the decline of the EU stock market returns and the weakening of the euro against the US dollar; a slowdown of the Russian economy and the rapid depreciation of the rouble against the euro; and, political and economic uncertainty in Greece captured by the negative performance of the Athens stock exchange and the rising long-term interest rate on Greek government bonds.
Domestic factors which negatively impact on the activity outlook include the higher unemployment, the high lending rates, low levels of fixed investment, and high levels of public debt.
According to the ERC the rising levels of NPLs, together with delays in the implementation of the relevant legal framework on foreclosures and in the effective management of such loans, could reinforce tight credit conditions with adverse effects on confidence and the real economy.
Delays in the advancement of agreed structural reforms and, in general, weaker commitment to the implementation of the economic adjustment programme agreed with the Troika could damage economic confidence and create risks to fiscal targets and activity, it said.
