Cyprus faces spike in economic uncertainty amidst regional conflict

After a relatively stable six-month period, economic uncertainty in Cyprus experienced a notable surge in October, with the Economic Policy Uncertainty (EPU) index reaching an estimated 256.63, compared to its September value of 202.84.

The Economics Research Centre (ERC) at the University of Cyprus, responsible for constructing the EPU index for Cyprus, has been analyzing the impacts of economic uncertainty on the Cypriot economy. The recent shift, outlined in a bulletin, is part of a research program conducted by the ERC in collaboration with the Ministry of Finance of Cyprus.

In a press release, the ERC highlighted that the significant change in October is partially attributed to the recent outbreak of the war between Israel and Gaza on October 7, 2023. The spike observed in Cyprus's EPU index is linked to its geographical proximity to the conflict area, unlike the European EPU index, which appears unaffected by the war thus far.

The EPU index, introduced by Baker, Bloom, and Davis in 2016, quantifies economic uncertainty concerning the effectiveness of applied economic policies. The ERC found that uncertainty in Cyprus was relatively lower and less volatile until 2007, with an upward trend post-2008. The highest peaks occurred in 2012 due to the banking crisis, in 2020 amid the Covid-19 pandemic, and in 2022 during the Russia-Ukraine war.