“Economic activity is forecast to pick up further in the following quarters of 2015 and in 2016. Real GDP growth for 2015 is projected at 1.1%. Real output is estimated to expand (y-o-y) by 0.5% in the second quarter of 2015 and by about 1.8% in the second half of the year. The projected growth rates for the second half of 2015 reflect the low levels of GDP reached during the corresponding period in 2014,” the ERC said in its August Economic Outlook.
“Economic recovery is projected to be rather slow as real GDP growth in 2016 is forecast also at 1.1%,” the centre added.
According to ERC figures, the Consumer Price Index inflation is projected at -1.7% and 0.7% for 2015 and 2016 respectively. “The negative inflation projection for 2015 is driven by the lower international oil prices combined with sluggish domestic demand. Low inflation is expected in 2016 as domestic demand and oil prices are anticipated to rise”.
The turnaround in domestic real economic activity and employment in the first quarter of 2015, which was followed by further improvements in a number of domestic leading indicators in the second quarter, is one of the main drivers of the projected recovery, cited by the ERC.
It added that the expansion of output in the EU and the euro area in the first quarter of 2015 creates a less adverse external environment for Cyprus.
In addition, lower international oil prices, in spite of the depreciation of the euro against the US dollar, as well as low inflation in the EU, which leads to higher real incomes and stronger external demand. According to the ERC, the faster weakening of the euro against the British pound in the first half of 2015 is expected to boost domestic activity in the following quarters through tourism services, whereas the slowdown of the Russian rouble depreciation against the euro in the second quarter has created less unfavourable conditions for foreign demand in Cyprus.
Recent reductions in domestic lending interest rates amid conditions of weak demand and elevated unemployment are found to facilitate economic recovery, whereas the return of domestic economic confidence to pre-crisis levels is estimated to boost growth in subsequent quarters, the centre noted.
The ERC noted that downside risks to the growth projections are associated with the high level of non-performing loans, ineffective implementation of the new insolvency and foreclosure legal framework and bottlenecks in the introduction of legislation for the sale of loans and lack of progress with structural reforms agreed in the economic adjustment programme (e.g. public administration, privatisations, health system).
“The recent economic developments in Greece which have worsened the outlook for the Greek economy could have a direct negative impact on the domestic economy, but could also cause adverse effects on Cyprus’s sovereign bond yields through heightened market uncertainty,” the ERC said, adding that “the recession in the Russian economy and rouble depreciation against the euro are likely to affect the outlook especially for 2015”.
It said that “upside risks to the outlook relate to stronger growth in the euro area, solid growth in the UK combined with the weakening of the euro against the British pound and a better than expected economic performance in Russia. Moreover, the negative impact of developments in Greece on the Cypriot economy could be short-lived as the connection between the financial systems of the two countries was limited in 2013”.
Progress with the implementation of the adjustment programme in Cyprus (i) provides access to the ECB’s monetary stimulus programme (expanded asset purchase programme) safeguarding the liquidity of the domestic banking system, and (ii) decouples markets’ sovereign risk assessments for Cyprus from those for Greece, the ERC noted.