The Cypriot economy is expected to maintain its strong growth rates in the next couple of years though risks linked with the banking sector remain, the European Commission’s autumn forecasts project.
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.
According to the forecast package presented by Commissioner Pierre Moscovici, in Cyprus public debt will fall from 105 per cent in 2018, to 98.4 per cent in 2019 and 91 per cent in 2020, while the budget will have a surplus of +2.8 per cent, +3 per cent and +2.9 per cent for the current and the next two years while inflation will reach 0.8 per cent, 1.3 per cent and 1.4 per cent respectively.
At the same time, the Commission predicts a sharp decline in unemployment from 8.2 per cent in 2018, to 6.3per cent in 2019 and 4.8 per cent in 2020.
The Commission warned however, 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” of GDP in 2018 to 105 per cent 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”.
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 per cent.
Going forward, growth is expected to remain fairly strong and above potential, albeit decelerating from 3.9 per cent in 2018 to 2.9 per cent 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,” the report said.
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”.
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 per cent 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 per cent and 2.5 per cent, 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.
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).
The general government surplus is forecast to improve to 2.8 per cent of GDP in 2018. Buoyant tax revenue growth underpinned by strong underlying economic growth will outpace government expenditure growth.