Economic growth in Cyprus remains strong

The European Commission forecasts the maintaining the dynamics of robust economic activity in Cyprus, with growth rates reaching 3.9% in 2018, 3.5% in 2019 and 2.9% in 2020, in its autumn economic forecasts that it made public in Brussels today.

According to the forecast package presented by Commissioner Pierre Moscovici, in Cyprus public debt is declining from 105% in 2018 to 98.4% in 2019 and 91% in 2020, while the budget will have a surplus of + 2.8% , + 3% and + 2.9% for the current and the next two years and inflation will reach 0.8%, 1.3% and 1.4%, respectively.

At the same time, the Commission predicts a sharp decline in unemployment from 8.2% in 2018 to 6.3% in 2019 and 4.8% in 2020. 

The Commission, though, warns, that "risks to the fiscal outlook are tilted to the downside, linked to the uncertainties on the potential 2018 deficit-increasing impact and contingent liabilities from the banking sector, the possible introduction of new taxation reforms in 2019 and the potential additional costs of the national health system reform".

In any case it states that "public debt is expected to register an upward level- shift by around 9 pps. of GDP in 2018 to 105.0%, due to banking support measures related to the CCB". However, "public debt is projected to steadily decline thereafter, reflecting the projected primary surplus and strong real GDP growth".

More specifically, according to the EC "economic activity is forecast to remain strong, driven by domestic demand, unemployment is expected to continue its rapid decline, while headline inflation is projected to pick up only moderately.."

"Robust economic growth is expected to support sustained budget surpluses and a decline in public debt from 2019 onwards, although the banking support measures in 2018 shifted public debt upwards and are likely to have deficit-increasing effects", says the Commission.

Economic growth in Cyprus remained strong in the first half of 2018, backed by solid private consumption, investment and exports, with real GDP growing by 4%. The recent revisions to GDP data paint a more pronounced V-shaped picture of Cyprus’ economic recovery since the crisis. For 2016, real GDP has been revised up by 1.4 pps., to 4.8%; and for 2017 by 0.3 pps. up to 4.2%. Going forward, growth is expected to remain fairly strong and above potential, albeit decelerating from 3.9% in 2018 to 2.9% in 2020.

According to the forecast, "growth is expected to become more domestic demand-driven. Private consumption accelerated in the first half of the year and is expected to remain fairly strong, as unemployment keeps rapidly declining, wages gradually increase and inflation remains low, further supporting real incomes. "Private investment is set to remain buoyant, reflecting the upbeat business sentiment and the many large scale projects already in the construction phase. Public consumption and investment are also in the recovery mode", reads the report.

Exports are expected to continue performing strongly in 2018, due to the sizable ship de- registration in the first quarter of the year (which statistically had the effect of increasing goods exports), but to weaken thereafter, reads the forecast.

Meanwhile "the underlying gradual softening stems from the tourism sector, which has been a driving force behind service sector exports in recent years. It is now confronted with increasing competition from neighbouring countries, where safety concerns are abating, and the lower purchasing power of some tourists (predominantly British and Russian) as a result of currency depreciations. Meanwhile imports, due to their significant content in final demand, are projected to outweigh exports, thus leading to an overall negative contribution of net exports to real GDP growth, and to a further widening of the current account deficit", says the Commission.

According to the Commission, positive labour market dynamics, with a rapid employment expansion since 2016, have continued, bringing the unemployment rate down to 8.1% by mid-2018, the lowest level in eight years. The strong expansion of the economy, and in particular the construction sector, provided employment opportunities also for the most vulnerable groups – young and long-term unemployed – reducing their unemployment rates to 19% and 2.5%, respectively. Employment expectations in key sectors are positive, signalling a bright outlook in the short term. Wage growth has remained contained, but recent increases in public wages and diminishing slack in the economy are expected to encourage wage rises in the private sector as well.

Headline annual HICP inflation is forecast to remain low, at 0.8% in 2018. During the first three quarters of the year, non-energy industrial goods experienced a period of declining prices amid increasing competition, while higher oil prices were transmitted into energy prices with a lag. Going forward, inflation is expected to pick up moderately as the tighter labour market translates into higher wages.

The budget balance is set to remain in surplus, excluding the impact of the banking support measures in 2018, yet to be determined

The government’s fiscal performance remains remarkably strong, with the primary surplus being among the highest in the euro area.

The budget surplus is expected to increase and remain high over the forecast horizon, although the projection for 2018 does not yet include the potential deficit-increasing impact of banking support measures related to the Cyprus Cooperative Bank (CCB), which is subject to a decision by the statistical authorities.

The general government surplus is forecast to improve to 2.8% of GDP in 2018. Buoyant tax revenue growth underpinned by strong underlying economic growth will outpace government expenditure growth. In particular, taxes on products are projected to benefit from strong consumption, while income taxes and social contributions are expected to be supported by improving labour market conditions. Expenditure is projected to increase somewhat at a slower pace than revenues, mainly due to public sector pay rises and social transfers.

Finally the Commission reports that in 2019, the headline surplus is forecast to slightly increase to 3.0% of GDP, mainly due to a rise in social security contributions and despite the public wage growth and the introduction of the Estia scheme (i.e. State support for loan repayment of eligible borrowers with NPLs backed by primary residences). In 2020, under a no-policy change scenario, the headline surplus is projected to somewhat decline in line with the projected growth moderation. The structural surplus is forecast to increase to 1.7% of GDP in 2018 and to narrow in 2019 and 2020 as the positive output gap widens.