UCY: Cyprus Economy Expected To Grow In 2017 And 2018

The expansion of real economic activity in Cyprus is expected to continue at robust rates in 2017 and 2018, according to the Economic Research Centre of the University of Cyprus. In 2017, real GDP is projected to grow by 3.0%. In the second and third quarters of 2017, real GDP is projected to rise (year-on-year) by 2.9% and in the final quarter of the year GDP growth is estimated at 2.8%. In 2018, real GDP growth is forecasted to slightly decelerate to 2.7%.
The factors driving the solid growth rates forecasted for the following quarters are given below:

• Robust activity and employment growth in Cyprus in the first quarter of 2017.

• Further positive developments in domestic leading indicators in the second quarter of the year and strong domestic economic sentiment.

• Improving domestic financial conditions, marked by deposit growth and deleveraging, as well as the low levels of lending interest rates.

• Favourable external economic conditions, such as steady growth and strong economic sentiment in the EU and the euro area, the resilience of the UK economy amid uncertainty after the Brexit vote, the recovery of the Russian economy and the favourable performance of international stock markets.

Other factors, such as the strong fiscal performance and the low levels of European interest rates (reflecting the accommodative monetary policy stance) facilitated the recovery in Cyprus as discussed in previous issues. Nevertheless, as growth gains momentum, the positive effects of these factors on the outlook weaken. The absence of upward pressures to the general price level in the past few years has also backed the economic recovery through its beneficial effects on purchasing power. However, as international oil prices and demand pick up, the positive impact of lower prices on real incomes and growth wanes.

According to the report the downside risks to the growth forecasts are as follows:

• The high ratio of public debt to GDP renders Cyprus vulnerable to negative shocks. Delaying structural reforms and relaxing fiscal discipline, especially in view of the upcoming elections, may undermine the sustainability of public finances and growth.

• The high levels of private debt and non-performing exposures continue to pose risks to the economy, despite progress with deleveraging and managing problematic loans (through e.g. restructurings, debt-to- asset swaps, third-party loan servicers). The large volume of problematic assets on banks’ balance sheets and the high indebtedness levels deprive the economy of growth-enhancing investment.

• Slower-than-expected growth in the UK and further depreciation of the pound against the euro, as a result of increased uncertainty during the Brexit negotiations, could negatively affect the outlook for the Cypriot economy.

Upside risks to the outlook are associated with public investment in infrastructure and private investment, especially in the sectors of energy, tourism and real estate. Moreover, better-than-anticipated growth outturn in the euro area, stronger-than-expected economic recovery in Russia and the rebound of the rouble may lead to faster growth rates than the current forecasts.

In 2017, CPI inflation is forecasted to reach 1.3% and in 2018, inflation is projected to pick up to 1.9%, as activity continues to expand and international oil and food prices gradually rebound.