Economic Forecast for Cyprus up to 2014. Main features of country forecast made in autumn 2012 by the DG ECFIN on behalf of the Commission. http://ec.europa.eu/economy_finance/eu/forecasts/
1. 12. CYPRUS
Deep recession to prevail over the forecast horizon
demand. Exports are expected to fall moderately in
Rapid deterioration in economic activity
2012, while the projected economic performance
The weakness of economic activity seen in the of Cyprus' major trade partners suggests a gradual
second half of 2011 is expected to intensify in increase in exports of both goods and services in
2012, when the Cypriot economy is projected to 2013 and 2014. In services, both tourism and
contract by 2.3% against the background of business services continued to perform well in
unwinding imbalances and widespread loss of 2012 and this trend is expected to continue in the
confidence among economic agents. The fiscal coming years. In particular, revenues from tourism
consolidation effort that has been pursued, the are expected to continue to rise. This reflects a
rapid deterioration in labour market conditions, projected increased flow of arrivals from Russia
and the high degree of economic uncertainty have and new destinations helped by government
together weighed heavily on private consumption. policies promoting tourism, and from tourists'
In addition, the tightening of credit conditions has concern over stability in competing Mediterranean
aggravated the unfavourable economic tourist destinations. Exports of transport services
environment while weak confidence has amplified are expected to shrink, while financial and other
the drag on investment activity. Adverse business services will stagnate over the forecast
developments in the external environment, horizon in view of worsen business confidence.
particularly in Greece, and the sustained volatility Overall, the current-account deficit is expected to
in European financial markets have affected narrow gradually over the forecast horizon in spite
Cyprus predominately via developments in the of a deterioration of the income balance.
financial sector. Graph II.12.1:Cyprus - GDP growth and contributions
12 6
The economy is projected to contract by 1.7% in pps. % of pot. GDP
2013, due to further declines in domestic 9
4
consumption, as well as in government and private 6
2
investments. Economic activity is expected to 3
contract further by 0.7% in 2014 with domestic 0 0
demand shrinking further and net exports still -3
-2
marginally supporting growth. Traditionally the -6
-4
main driver of growth, domestic demand is set to -9 forecast
contract over the forecast horizon driven by -12 -6
01 02 03 04 05 06 07 08 09 10 11 12 13 14
markedly weaker consumer confidence and lower Output gap (rhs) Net exports
household disposable income, which stem in turn Inventories Dom. demand, excl. inv.
GDP (y-o-y%)
from the effects of fiscal consolidation and the
worsening labour market outlook. Investment is Worsening labour market conditions
projected to decline in view of the difficulties in
Employment is expected to worsen in 2012 and
accessing credit and the high level of corporate
subsequent years, reflecting the slowdown in
indebtedness. In spite of the reconstruction work at
economic activity. Job losses are particularly
the electricity power plan and the private
prominent in labour-intensive sectors such as
investment in a new oil storage facility,
construction and trade. The unemployment rate
construction activity is expected to continue to
would remain on a strong upward trend, rising
shrink strongly in 2012 and 2013. Although
from 7.9% in 2011 to 12.1% in 2012, and is likely
construction indicators suggest that the correction
continue to increase further in 2013 and to be close
should persist in 2014, this is expected to be at a
to 14% in 2014. Given the unfavourable labour
milder pace reflecting the general level of
market conditions and the effects of fiscal
economic activity in the economy as a whole.
consolidation, wage growth is expected to be
negative. In particular, the freezing of public sector
On the other hand, the external sector is expected
wages until 2014 should affect wages in the
to provide a positive contribution to growth for the
economy as a whole.
whole forecast period. In particular, imports of
both goods and services are set to decline
considerably against a backdrop of weak domestic
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2. Member States, Cyprus
Inflation declining conditions, and lower productivity. Furthermore,
any worsening of the economic situation in Greece
HICP inflation is projected to decline to 3.2% in
remains a significant downside risk for Cyprus as
2012 on the back of weaker domestic demand and
well as any further needs of recapitalisation for the
the fading-out of the base effect of the electricity
domestic banks.
prices increases in 2011 despite increasing oil and
commodity prices and of VAT standard rate by
2 pps. With domestic demand remaining subdued, Fiscal and financing imbalances prevail
the effect of the VAT increase and the projected
The general government deficit is set to narrow to
decline of oil and commodity prices, headline
5.3% of GDP in 2012. Should no further measures
inflation is projected to ease further to 1.5% in
be adopted, the deficit will rise further to 5.7%
2013 and to 1.3% in 2014.
GDP in 2013 and to 6% in 2014. The downgrading
of the government sovereign to non-investment
Significant downside risks exist grade raised yield spreads to prohibitive levels,
with the government covering its financing needs
Cyprus requested external financial assistance
through short-term borrowing from the domestic
from the EFSF/ESM in view of the challenges
market. The government's participation in the
facing the economy. Under the no-policy-change
recapitalisation of a commercial bank (which was
assumption (the draft 2013 Budget not yet
unsuccessful in implementing its capital
available), significant downside risks are present
enhancement plan) is expected to increase the
for the current account, public finances, and the
general government debt significantly from 71.1%
financial sector, testing the economy's
in 2011 to about 90% of GDP in 2012. In view of
sustainability. Failure to raise the required capital
shrinking economic activity, the government debt-
and to put policies back on a sustainable path
to-GDP ratio is projected to reach 96.7% in 2013
could dramatically worsen the outlook and
and 102.7% in 2014. The fiscal imbalances are set
reinforce the negative loop of lower liquidity,
to persist despite the significant consolidation
higher indebtedness, worsening labour market
effort pursued in 2012.
Table II.12.1:
Main features of country forecast - CYPRUS
2011 Annual percentage change
mio EUR Curr. prices % GDP 92-08 2009 2010 2011 2012 2013 2014
GDP 17979,3 100,0 4,3 -1,9 1,3 0,5 -2,3 -1,7 -0,7
Private consumption 11899,2 66,2 - -7,5 1,5 0,2 -3,4 -3,6 -0,9
Public consumption 3584,2 19,9 - 6,8 1,0 -0,2 -1,7 -2,4 -1,5
Gross fixed capital formation 2941,8 16,4 - -9,7 -4,9 -13,1 -22,0 -12,0 -5,3
of which : equipment 828,0 4,6 - -0,3 -5,9 -23,1 -26,0 -11,0 -3,7
Exports (goods and services) 7699,0 42,8 - -10,7 3,8 3,3 -0,9 0,8 1,3
Imports (goods and services) 8251,7 45,9 - -18,6 4,8 -4,1 -9,3 -5,5 -0,4
GNI (GDP deflator) 16481,6 91,7 4,4 -4,9 2,4 3,6 -2,4 -1,7 -0,7
Contribution to GDP growth : Domestic demand - -6,3 0,2 -2,4 -6,2 -4,4 -1,5
Inventories - -1,6 1,8 -0,5 0,0 0,0 0,0
Net exports - 5,7 -0,7 3,4 3,9 2,8 0,7
Employment - -0,5 0,0 0,5 -4,0 -0,6 -0,3
Unemployment rate (a) - 5,5 6,4 7,9 12,1 13,1 13,9
Compensation of employees/head - 2,5 2,7 3,3 -0,9 -0,3 0,5
Unit labour costs whole economy - 3,9 1,4 3,3 -2,6 0,8 0,9
Real unit labour costs - 3,8 -0,5 0,5 -4,2 -0,7 -0,4
Saving rate of households (b) - 11,4 11,6 4,1 5,2 7,3 7,5
GDP deflator 3,4 0,1 1,9 2,7 1,6 1,5 1,2
Harmonised index of consumer prices - 0,2 2,6 3,5 3,2 1,5 1,3
Terms of trade of goods - 2,7 -0,9 -0,6 -1,7 -0,1 -0,9
Merchandise trade balance (c) - -25,5 -26,8 -24,2 -21,9 -20,6 -20,7
Current-account balance (c) - -10,7 -9,2 -4,2 -6,3 -3,5 -3,0
Net lending(+) or borrowing(-) vis-à-vis ROW (c) - -10,6 -9,0 -4,0 -5,5 -2,7 -2,4
General government balance (c) - -6,1 -5,3 -6,3 -5,3 -5,7 -6,0
Cyclically-adjusted budget balance (c) - -6,2 -5,3 -6,1 -4,4 -4,8 -5,3
Structural budget balance (c) - -6,2 -5,3 -5,9 -4,6 -4,8 -5,3
General government gross debt (c) - 58,5 61,3 71,1 89,7 96,7 102,7
(a) Eurostat definition. (b) gross saving divided by gross disposable income. (c) as a percentage of GDP.
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