According to a European Commission paper that evaluates the island’s economic adjustment programme, despite its severity, the recession was less pronounced than expected in 2013 (5.4%), thanks to tourism and professional services, and the less than expected decrease in private consumption.
Unemployment levels increased significantly but the labour market proved flexible, while the gradual adjustment of wages helped to contain the fall in employment, the report said. However, the need for private and public debt adjustment from the current high level will continue to act as an obstacle to economic growth.
GDP is expected to decline by a further 4.2% in 2014, and the economy is expected to return to modest growth of 0.4% next year.
Improvement would be gradual as domestic demand is burdened by the need to reduce the high debt levels, but the Commission thinks these challenges are following a downward trend. The risks stem mainly from slower than anticipated recovery of non-performing loans (NPLs), a possible prolonged period of tight lending conditions, a slower than expected deleveraging process for households, further deterioration in the labour market and worsening tensions in Russia and Ukraine.
According to the Commission, the budgetary targets for 2013 have been achieved to a remarkable degree, both because of continued prudent budget execution and the less severe recession.
The public deficit in 2013 was about two percentage points below the target set, while the government deficit in 2014 is projected to be about half a percentage point lower than expected, at 5.3% of GDP.
Regarding the banking sector, the Commission notes that there are emerging signs of stabilisation, although there are still significant challenges. The challenges have to do with the need for consolidation of the balance sheets of banks from the high level of non-performing loans and to reduce the debt of the private sector so as to restore credit and sustainable development.
A key element to this purpose is the development of a suitable framework for debt restructuring, the Commission said, adding also the need to continue work on the implementation of the restructuring plans of domestic banks.
Source: Cyprus Mail