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Cyprus Central Bank Predicts GDP growth, Lower Unemployment And Inflation Normalisation Over The Next Two Years

Cyprus Central Bank Predicts GDP growth, Lower Unemployment And Inflation Normalisation Over The Next Two Years

Favourable developments in the main macroeconomic indicators of the Cypriot economy for the years 2022-2024 are projected in the medium-term forecasts for September 2022, according to the Central Bank of Cyprus on Thursday.

In a press release the Central Bank said that, despite the war in Ukraine and the subsequent international sanctions imposed on Russia, the Cypriot economy has recorded significant growth of 6% in the first half of 2022, with the effects of the war expected to become more pronounced in the second half of this year and in 2023.

In particular, it noted that the downward revision of the external environment outlook due to the turbulence in global energy markets has adversely affected consumer and business sentiment, with euro area economy expected to stagnate later this year and in the first quarter of 2023, which will also have an impact on the domestic market.

In addition, it said that the significant increase in energy prices is expected to reduce the purchasing income power, which combined with rising interest rates will result in a negative impact on domestic demand despite the utilisation of savings accumulated due to the pandemic.

Also, the Central Bank pointed out, despite their mitigation, disruptions in the raw materials and goods supply chain continue to affect economic activity and contribute to rising prices, with a gradual correction expected in 2023. 

Regarding the economic growth rate for 2022, CBC reports that it is expected to reach 5.5%, the same as in the previous year, with GDP growth expected to be driven mainly by domestic demand (investment and private consumption), but also by a faster-than-expected recovery in the tourism industry, despite a negative contribution from the net exports side.

It is noted that the projected resilience in domestic demand stems from anticipated investment, the reopening of the economy after the acute phase of the pandemic, particularly in the first half of the year, especially in the services sector, and, in part, from the recovery in private consumption as a result of the utilisation of savings.

The upward revision of 2.8 percentage points in 2022 compared with the June 2022 forecast is mainly due to better-than-expected performance of tourism-related economic activities and, to a lesser extent, in the information and communication sector, due to the continued arrival of foreign companies linked to the technology sector.

As indicated, in 2023 and 2024 GDP growth is expected to reach 2.5% and 3.1%, respectively, with the downward revision compared to previous projections being due to the unfavourable outlook in the external environment, given the negative impact of the protracted Russian-Ukrainian war, as well as some medium-term scarring effects, mainly on turnover in the professional services sectors.

In terms of unemployment, it is expected to register a decline in 2022 to 6.7% of the labour force compared to 7.5% in 2021, with a slight downward revision of 0.2 percentage points compared to the June 2022 forecast, which is due, based on available data, to a greater-than-expected tightness in the labour market, and an expected manageable impact of the war, as indicated by the European Commission's recent monthly surveys of employment expectations over the next three months.

It is added that a downward trend is projected in the coming years, with unemployment reaching 6.5% in 2023 and approaching full employment conditions reaching 5.9% in 2024, with the upward revision relative to previous projections of 0.2 percentage points per year being due to the downward revision of the GDP outlook in 2023 and 2024 for the reasons mentioned above.

As regards inflation (Harmonized Index of Consumer Prices), CBC reports that it is projected to rise significantly in 2022 to 8.4% from 2.3% in 2021, remaining at or near 9% in the remaining months of this year. The upward revision of 1.4 percentage points from the June 2022 forecast is mainly due to higher energy prices, demand-side pressures on some services due to the reopening of the economy after the acute phase of the pandemic, disruptions in supply chains, and greater-than-expected tightness in the labor market.

As in the previous forecasts, inflationary pressures are projected to gradually level off in 2023 and 2024, with inflation at 3.9% and 2.1%, respectively, with a deceleration of HICP in the following years due to the projected gradual correction in oil and food prices and the stability of longer-term inflation expectations.

Referring to structural inflation, i.e. inflation excluding energy and food, the Bank said it is expected to rise to 5.1% in 2022, up from 1.3% in 2021, and is projected to fall to 2.9% and 2.3% in 2023 and 2024 respectively.

This, the press release added, is mainly due to the expected slow normalisation of supply chain disruptions in line with the impact on demand from the recent rise in interest rates. The upward revision relative to the June 2022 projections is due to indirect effects from higher energy prices due to lagged effects on inflation subcategories, and the resilience expected to continue to be shown by the labour market.  

In relation to a potential deviation from the baseline projections scenario, the Bank said that the main downside risks to GDP are associated with the likelihood of a larger-than-expected negative impact on services exports due to the protracted war and the associated impact on the external environment, and are also associated with higher-than-expected commodity and product prices, in line with lingering effects from supply chain disruptions.

In relation to inflation, upside risks stem mainly from higher-than-expected oil prices, as well as from protracted disruptions in supply chains. For 2024 in particular, any wage-price spiral and possible higher long-term inflation expectations are the main upside risks.

Source: CNA

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