* EC Spring forecast: Progress on structural reforms promises new steam to a delayed economic recovery *
The recession in Cyprus moderated significantly in 2014 with the second half of the year being weaker than the first, the European Commission said in its Spring 2015 economic forecasts.
Saying that the economy will continue contracting this year maintaining a downward path that began in 2012, the forecast explained that low oil prices are expected to support growth in 2015 but external demand will still be exposed to headwinds from the Russian economy.
“Recent progress on structural reforms should underpin the economic recovery,” it said, adding that “fiscal adjustment is expected to continue.”
The Commission downgraded its forecasts, noting that the Cypriot economy will contract with a rate of 0.5% compared to a 0.4% growth projected in the winter forecasts. Cyprus has been in continuous recession since the third quarter of 2011.
The economy contracted by 5.4% in 2013, followed by a contraction with a rate of 2.3 in 2014. According to the European Commission, Cyprus will contract by 0.5% in 2015, followed by 1.4% in 2016.
“Although available short-term indicators for economic activity in the beginning of 2015 suggest a slowly improving growth momentum, the economy is not expected to grow before 2016,” the Commission said, noting however that the downside risks remain tilted to the downside owing to high non-performing loans ratios and the recession in Russia that “could have larger negative effects than anticipated.”
It added that general government balance will worsen in 2015, reflecting the prolonged economic recession, impacting mostly on tax revenues, but also other factors, such as location rules regarding VAT for e-commerce services and a decrease in dividend income from the Central Bank of Cyprus.
The Commission noted that in 2016 the gradual deleveraging of both households and corporates should remove impediments to a more balanced growth.
It added that the insolvency and foreclosure framework adopted in April should allow for more effective tools to deal with the high ratio of non-performing loans and will help restore the health of the banking sector, loosen credit supply conditions and support a moderate pick-up in domestic demand.
According to the Commission, public debt will marginally decline to 106.7% in 2015 from the peak of 17.5% in 2014 and will continue its rise again at 108.4% in 2016.
“The ensuing growth momentum is expected to gradually ease unemployment. HICP inflation is forecast to turn positive in 2016, as energy prices rebound,” the Commission said.
The Commission estimates that unemployment will rise marginally at 16.2% in 2016 compared to 16.1% in 2014, whereas Harmonised inflation (HICP) will be negative at 0.8% compared to 0.3% in 2014.
