The Univeristy of Cyprus` Economic Research Centre, in its quarterly Economic Outlook bulletin has predicted that the Cypriot economy will grow by 2.9% in 2016 and 3.2% in 2017.
It has warned however that there are downside risks which could negatively impact its predictions including the possibility of fallout from the Brexit decision, the high private indebtedness levels and delays in the advancement of structural reforms.
“The recovery of the Cypriot economy is estimated to strengthen as real GDP is forecasted to expand by 2.9% in 2016,” the Center says in its outlook summary.
“Robust growth is expected to continue in 2017 as real GDP is projected to increase by 3.2%,” it continues.
Referring to the the main drivers of the projected increase it points to the fact that real GDP continued to rise, employment growth accelerated and the unemployment rate declined further in the second quarter of 2016; domestic leading indicators, including economic sentiment, continued to pick up during the third quarter.
The long period of past declines in international oil prices will support economic activity in Cyprus in the following quarters, through effects on real incomes and demand, it says.
At the same time it points out that the recovery of financial markets after the losses registered in the first half of 2016, suggests a less adverse outlook for emerging market economies and a calmer than expected market reaction to the Brexit vote.
“The fiscal performance that has been bridging the gap between government expenditure and revenue is expected to contribute to a sustainable recovery,” it adds.
Another factor would be “the rise in deposits, combined with deleveraging, results in a declining loan-to-deposit ratio, suggesting improved conditions in the domestic banking sector, with positive effects on growth.”
“If, however, the reduction in the stock of loans leads to increased real estate assets for banks, risks
to the stability of the sector may emerge in an environment of subdued property prices,” it warns.
At the same time it notes that the external economic environment, marked by steady levels of economic confidence, moderate growth rates in the EU and the euro area, and low levels of European interest rates, “continues to support the recovery in Cyprus.”
Nevertheless, the protracted period of near-zero interest rates in the euro area reflects conditions of sluggish demand and therefore uncertainties about the bloc’s growth momentum, it says.
According to the Economic Outlook bulletin “a slowdown in output growth in the UK and further depreciation of the pound against the euro, as aresult of increased political and economic uncertainty following the Brexit vote, are expected to directly affect the Cypriot economy, primarily through weaker exports, mainly tourism services”, would be included in the downside risks to the growth projections.
“Weaker than expected growth in the EU and the euro area as a result of a larger than anticipated negative impact on member states’ exports to the UK, and uncertainty regarding the UK’s exit process from the EU,” is also a downside risk factor.
“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 for the economy, especially in conditions of subdued real estate prices and property demand,” the Centre says.
It further warns that “the high public debt-to-GDP ratio renders Cyprus vulnerable to external negative shocks; thus 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.”
At the same time “upside risks to the outlook include an improved performance of the Russian economy as oil prices are rebounding, and new investment projects linked to tourism, energy and public infrastructure.”
Referring to inflation it forecasts that “CPI inflation in 2016 is projected at -1.3%.”
The negative inflation projection, “is driven by past declines in international prices for oil and non-energy commodities that kept the general price level subdued in the previous quarters.”
“In 2017, CPI inflation is forecasted to increase to 1.9% as activity is anticipated to expand further and energy prices are expected to pick up,” the Centre says./IBNA
Source: Cyprus News Agency