The Cyprus economy is expected to continue on its recovery path over the next quarters, with real GDP forecast to grow at a pace of 2.7% this year, according to a University of Cyprus outlook that seems far more optimistic than the European Commission projections.
The Economics Research Centre (CypERC) of the university said in its Economic Outlook for January that “the recovery of economic activity in Cyprus is forecasted to continue in the following quarters. Real GDP growth for 2015 is projected at 1.5%. Real output growth for the fourth quarter of 2015 is estimated at 2.8%. Growth is expected to gain momentum in 2016, as real GDP is forecasted to expand by 2.7%.”
The CypERC report detailed the main drivers of the projected increase in real activity as:
– The growth rate (y-o-y) of real GDP and employment strengthened in the third quarter of 2015, and many domestic leading indicators continued to improve during the final quarter of 2015.
– The recent reductions in domestic lending interest rates, amid conditions of weak demand and high unemployment, as well as stronger normalisation tendencies in the banking system are facilitating the recovery.
– Domestic economic confidence strengthened in 2015, despite some short-lived setbacks related to developments in Greece; a further upturn in all domestic sentiment indicators in the fourth quarter of 2015 is found to have improved the outlook.
– Lower international oil prices, downward pressures to the domestic aggregate price level and low inflation in the EU are expected to assist recovery through their effects on real incomes and demand.
– Modest growth in the euro area and steady growth in the UK as well as further increases in European economic sentiment indicators support the recovery in Cyprus by creating favourable foreign demand conditions.
– The weakening of the euro against key currencies, most notably the British pound, is expected to boost domestic activity in the following quarters through exports, particularly tourism services.
– Reductions in the European lending interest rates during the second half of 2015 reflect the ECB’s accommodative monetary policy stance, which is supportive of the recovery process in Cyprus.
Looking at the downside risks to the growth projections, the CypERC report said that “the high levels of non-performing loans pose major risks to the stability of the banking system and to the outlook for the economy. Ineffective implementation of the new insolvency and foreclosure legal framework could delay the resumption of healthy credit conditions and robust economic growth.”
The outlook added that “delays in the implementation of structural reforms agreed in the economic adjustment programme (e.g. public administration, privatisations, health system) may create risks to public finances, Cyprus’s market borrowing costs, especially after the end of the economic adjustment programme, and to activity.”
It concluded that a final risk factor was the “deterioration of the external economic environment for Cyprus due to (i) the recession in Russia, (ii) weaker than expected growth in the euro area and the UK, as a result of a slowdown in emerging markets, especially in China, and (iii) heightened geopolitical tensions in eastern Mediterranean.”
On the upside, the CypERC outlook said that favourable factors include “a longer period of lower international oil prices leading to lower energy costs with positive effects on domestic activity,” as well as “investment decisions linked mainly to tourism and energy, as well as public investment efforts for the expansion and/or improvement of infrastructure.”
On the other hand, renewed recession in Greece is not likely to have negative effects on Cyprus due to the recent weakening of connections between the banking systems of the two countries.
“The worsening of the Greek economic outlook alone is not expected to reverse the recovery in Cyprus,” the CypERC report said.
CPI inflation in 2016 is projected at 0.3%, the report said, explaining that the low inflation projection is driven by the lower international oil prices and by price declines in the international prices of non-energy commodities combined with sluggish domestic demand.
Looking ahead, it said that “inflation is projected to pick up in the second half of the year as activity and demand will continue to firm up.”
The CypERC forecast for real GDP growth for 2015 is revised from 1.3% in the October issue to 1.5% in the January outlook, based on quarterly data available up to the third quarter of 2015 and monthly indicators for the fourth quarter of 2015.
Thus, the growth forecast for 2016 is revised upward from 1.5% to 2.7% due to a higher than forecasted real GDP growth rate in the third quarter in Cyprus, modest growth rates in the EU, as well as from further improvements registered in a number of domestic leading indicators during the final quarter of 2015.
The forecast for CPI inflation in 2016 is revised upwards from -0.4% in the October issue to 0.3% in January. The upward revision resulted from a slower contraction of the general price level in the final quarter of 2015 compared to the third quarter of 2015 and from the pickup of domestic demand.
The forecasts for 2015 and 2016 suggest that real activity will continue to improve. The growth forecast for 2015 is in line with the projection of the Central Bank of Cyprus; it is, however, more optimistic than the forecast of the European Commission.
“Furthermore, the forecast for 2016 points to faster growth than the rate projected by the Central Bank of Cyprus and the European Commission,” the CypERC report said, concluding that “the econometric analysis based on the currently available data suggests that the economic recovery in Cyprus will continue at a similar pace in 2017.”
