Nicosia, October 13, 2015/Independent Balkan News Agency
The Cypriot economy will grow by 1.3% in 2015, University of Cyprus Economic Research Centre (ERC) projects, revising its previous forecast for a 1.1% GDP in the current year.
In its October economic outlook issue, the ERC notes that in the backdrop of an economic growth of 0.8% in the second quarter, real output is estimated at annual 1.9% and 2.6% in the third and fourth quarter of 2015 respectively.
According to the ERC, real GDP growth in 2016 is forecasted at 1.5%.
The ERC cites the accelerated growth and employment year-on-year and the in a number of activity-related domestic leading indicators continued during the third quarter, the stronger growth in the euro area and steady growth in the UK during the second quarter, as well as further increases in European economic sentiment indicators in the third quarter that support the recovery in Cyprus.
It also cites the recent reductions in domestic lending interest rates amid conditions of weak demand and elevated unemployment are found to facilitate economic recovery, noting that the return of domestic economic confidence to pre-crisis levels and the good fiscal performance are estimated to contribute to growth.
According to the ERC, lower international oil prices and inflation in the EU are expected to benefit economic activity in Cyprus through their effects on real incomes, and on both domestic and external demand, whereas the weakening of the euro against key currencies, most notably against the British pound, is expected to boost domestic activity in the following quarters through exports, particularly tourism services.
Further reductions in the European lending rates and in the borrowing costs of euro area governments (with the exception of Greece) reflect ECB’s accommodative monetary policy stance, which is also backing the recovery process in Cyprus, the ERC added.
However the ERC notes that downside risks to the Cypriot economic outlook stem from the high levels of non-performing loans pose major risks to the stability of the banking system and to the outlook for the economy.
“Ineffective implementation of the new insolvency and foreclosure legal framework and bottlenecks in the introduction of legislation for the sale of loans could delay the restoration of healthy credit conditions and economic growth,” the ERC notes.
It also highlights delays in the implementation of structural reforms agreed in the economic adjustment programme (e.g. public administration, privatisations, health system) may create risks to public finances, Cyprus’s market borrowing costs and, therefore, to economic activity, a deterioration of the external economic environment namely, the worsening of the outlook for the Greek economy, the downturn in Russia and weaker than expected growth in the euro area and the UK, as a result of a slowdown in emerging markets, especially in China, could pose risks to the recovery momentum in Cyprus.
Upside risks to the economic outlook concern a longer period of lower oil prices with positive effects on consumption, limited negative spillovers from adverse economic developments in Greece due to the recent weakening of the connections between the Cypriot and Greek banking systems; and (investment decisions linked mainly to tourism, energy and financial services as well as public investment efforts for the expansion/improvement of infrastructure.
CPI inflation in 2015 is projected at -2.1%, while in 2016 CPI inflation is estimated to remain slightly below zero, mainly driven by the lower international oil prices combined with sluggish domestic demand.