The European Commission has revised its economic projections for Cyprus citing a downward trend due to the effects of Russia’s invasion of Ukraine and the associated sanctions against Moscow on the island’s tourist and services sector.
In its spring forecasts, issued on Monday, the European Commission said that the Cypriot GDP growth will slow down to 2.3% in 2022, which is 1.8% less than its previous projections, while growth will accelerate to 3.5% the following year, in line with the previous projection issued in February 2022.
Russia’s invasion of Ukraine and the related sanctions are expected to impact economic activity, especially tourism and services exports, as Russia is an important market for both
“The Cypriot economy started 2022 on a strong footing, but Russia’s invasion of Ukraine and the related sanctions are expected to impact economic activity, especially tourism and services exports, as Russia is an important market for both,” the European Commission said in its forecast for Cyprus.
Moreover, the EU Commission said that headline inflation (HICP) will register a considerable increase, reaching 5.2% in 2022, doubling its previous projection of 2.6%, and is projected to decline to 2.7% the following year, which is significantly higher than the previous estimate.
“This is mainly due to exceptionally high oil prices, as Cyprus depends heavily on oil products. The prices of non-energy industrial products and food have also increased as a result of supply chain disruptions and the secondary impact from higher energy prices,” the Commission added.
According to the Commission, the unemployment rate remained broadly stable in 2021 at 7.5%. Employment and vacancies were on the rise at the end of 2021, whereas the slowdown of economic activity “is set to put brakes on the labor market later this year.”
In 2022, unemployment is predicted to increase somewhat to 7.8%, before resuming its decreasing trend in 2023 to 7.3%, the Commission added.
The Commission, however, noted that “significant uncertainty and downside risks to the growth outlook remain, as the tourism sector and other export-oriented services sectors are particularly vulnerable to external shocks.”
Furthermore, the Commission projects that, despite the economic slowdown, Cyprus' fiscal deficit will continue to improve, as the government phases off its pandemic-related support measures.
In 2022, the deficit is expected to further improve to 0.3% of GDP and will improve marginally to 0.2% in 2023.
Public debt, after its decline to 103.6% of GDP in 2021 on the back of high nominal GDP growth and thanks to cash reserves accumulated in the previous year, is expected to decrease to 93.9% and 88.8% in 2022 and 2023, respectively, the Commission added.