University of Cyprus revises growth forecast upwards to 2.9%

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By Stelios Orphanides

Cyprus’s economy is projected to expand 2.9 per cent, which is the fastest pace since 2008, and beats the 2.2 per cent and 2.7 per cent updated forecasts by the finance ministry and the central bank respectively, even as Brexit and the political and economic uncertainty the June 23 referendum triggered pose a downside risk, the University of Cyprus said.

“The recovery of the Cypriot economy is estimated to gain momentum as real gross domestic product is forecasted to expand by 2.9 per cent in 2016,” the Economic Research Centre of the University of Cyprus said in a statement on its website on Monday. “Robust growth is expected to continue in 2017 as real GDP is projected to increase by 3.0 per cent”.

The ERC, which revised its April forecast by a 0.5 percentage point upwards, said that “leading indicators improved further during the second quarter of the year” after economic output and employment continued to grow in the first three months of the year. It added that it expects consumer prices to fall 1.8 per cent this year before rising 1.6 per cent next year.

“Low international oil prices and subdued non-energy commodity prices are expected to continue benefiting activity in Cyprus in the following quarters through their effects on real incomes and demand,” the ERC said.

Economic recovery is also supported by the external environment, as reflected by “steady levels of economic confidence,” even as economic growth in the European Union remains moderate and European interest rates remain low, the ERC said.

In addition, Cyprus’s fiscal consolidation following the crisis, combined with “stronger normalisation tendencies” in the banking sector reflected in a recovery of deposits and an increase in business loans in the first five months of the year, are also supporting growth, the academic institution continued.

Miniture representations of Brexit are placed in Mini-EuropeStill, “a slowdown in output growth in the UK and further depreciation of the pound against the euro, as a result of increased political and economic uncertainty following the Brexit vote, are expected to directly affect the Cypriot economy, primarily through weaker exports of (tourist) services and goods,” the ERC said.

Further downside risks include a weaker than expected economic performance in Europe as a result of a spill-over effect from emerging economies and the uncertainty over the pending political divorce from the UK, and increased geopolitical turmoil affecting investor sentiment and tourism, the ERC said. As the level of private and public debt remains high compared to the economy, Cyprus remains vulnerable to external shocks.

“Fragile euro area economies, including Cyprus, are more susceptible to setbacks in the recovery of the euro area, for example, by experiencing increases in their borrowing costs,” it said.

bank run banking crisisGiven Cyprus’s public debt to economic output ratio, which stood at 109 per cent last year, “delays in the advancement of structural reforms may create risks to public finances, Cyprus’s credibility and market borrowing costs, particularly during a period of high risk aversion in international markets,” the ERC said. “The high private indebtedness levels that have led to deleveraging and increased default rates, continue to pose significant risks to the stability of the domestic banking system and to the outlook of the economy, especially via developments in property prices”.

On the other hand, an improved performance in Russia on rebounding oil prices, possible investment decisions in tourism and energy and public investment projects could be seen as upside risks, the ERC said.

“Moreover, political instability or geopolitical tensions in neighbouring counties could have positive effects on domestic activity, if Cyprus is perceived as a less risky business or tourist destination,” it added.

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