articles | 13 February 2023

Cyprus economy expected to slow down amidst challenging external conditions

The European Union’s economy will avoid recession but headwinds continue to be an issue, according to the European Commission’s interim winter economic forecasts for 2023, presented by Economy Commissioner Paolo Gentiloni in Brussels.

Regarding Cyprus, forecasts expect a significant slowdown in economic activity towards the end of the year, primarily due to global challenges and persistent inflationary pressures, after experiencing robust growth during the first half of 2022. The report noted, however, that Cyprus’ public finances are expected to remain healthy, although with a slimmer surplus than previously.

Unemployment is expected to fall to 7.2 per cent in 2022, down from 7.5 per cent in 2021, remaining stable in 2023 before dropping to 6.9 per cent in 2024. Inflation is expected to increase to 8 per cent in 2022, up from 2.3 per cent in 2021, before dropping to 4.2 per cent in 2023 and 2.5 per cent in 2024.

According to pan-European forecasts, a year after the start of Russia’s invasion of Ukraine, the EU economy enters 2023 in better shape than expected in the autumn, with growth forecast at 0.8 per cent in the EU and 0.9 per cent in the eurozone. In addition, both the eurozone and the EU are expected to narrowly avoid a recession, while forecasts for inflation in 2023 and 2024 have also fallen from initial estimates.

In terms of growth, there was a slowdown in the third quarter, but lower than originally expected. The annual growth rate for 2022 is now estimated at 3.5 per cent in both the EU and the eurozone.

At the pan-European level, the more positive outlook is attributed to the continued diversification of energy sources and the fall in natural gas consumption which has resulted in natural gas stocks being above the seasonal average of the past few years, at a time when wholesale natural gas prices are now lower than before the war. 

At the same time, the pan-European unemployment rate remained low, coming at 6.1 per cent at the end of 2022, while readings in January indicated that economic activity will likely avoid a contraction in the first quarter of 2023.

However, challenges remain as consumers and businesses continue to face high energy prices, while core inflation, meaning inflation excluding energy and non-processed food, continued to rise in January, further undermining household purchasing power. As for Cyprus’ GDP, there was an increase of 6.3 per cent in the first half of 2022 compared to the same period in 2021, mainly due to domestic demand.

Strong growth in private consumption was supported by employment growth and savings built up during the pandemic. At the same time, there was an increase in investment supporting the implementation of the National Recovery and Resilience Plan. However, construction investment was adversely affected by high material prices and tighter lending conditions.

The tourism sector performed well as tourism arrivals and revenue reached nearly 80 per cent and 90 per cent of pre-pandemic levels respectively in the first quarter of the year. In addition, exports of information communication and technology services and financial and transport services continued to expand in the first half of 2022.

According to the European Commission, growth is expected to slow significantly after the last quarter of 2022 due to the slowdown in the global economy, rising interest rates and increasing pressure on prices, especially in terms of energy. Furthermore, the low purchasing power of Cyprus’ trading partners will burden service exports, especially in tourism. Additionally, the weakening of consumer and business confidence in Cyprus and the increase in interest rates are negatively affecting private consumption and household investment, a trend that is expected to intensify in 2023.

Targeted government measures to mitigate the impact of high energy prices and the partial wage adjustment to be implemented in January 2023 are expected to support purchasing power. Wage adjustment affects about 50 per cent of workers covered by collective agreements, somewhat limiting the negative impact on private consumption.

What is more, the implementation of the National Recovery and Resilience Plan is expected to support investments during the timeline used in the commission’s forecast. Overall, real GDP is forecast to grow by 5.6 per cent in 2022 and slow to 1 per cent in 2023, before picking up slightly in 2024 when it’s expected to reach 1.9 per cent.

However, significant uncertainty and risks to the growth outlook remain, as the tourism sector and other export-oriented service sectors are particularly vulnerable to external shocks.

The unemployment rate is expected to decrease slightly in 2022 to 7.2 per cent compared to 7.5 per cent in 2021. In the first half of 2022, employment and job vacancies registered an increase, while the slowdown in economic activity is expected later this year to put a brake on the positive performance of the labour market. In 2023, the unemployment rate is projected to remain stable, before falling to 6.9 per cent in 2024.

Headline inflation in Cyprus is expected to increase to 8 per cent in 2022, up from 2.3 per cent in 2021. This is mainly due to extremely high oil prices, as Cyprus is highly dependent on petroleum products. In 2023, oil prices are expected to moderate, but the partial wage adjustment will have some upward spillover effects on core inflation. Overall, inflation is forecast to slow to 4.2 per cent in 2023 and 2.5 per cent in 2024.

Regarding public finances, it is reported that fiscal performance was stronger than expected in 2021 and 2022, supported by the economic recovery. In 2022, Cyprus is projected to generate a surplus to the tune of 1.1 per cent of GDP. Government revenue is expected to grow significantly, rising by 10.2 per cent in 2022, due to high inflation. This growth is only marginally offset by the 3.1 per cent increase in public spending. Growth in public spending remains low due to the phasing out of pandemic-related support measures for businesses and workers. At the same time, the cost of measures to mitigate the effects of high energy prices, mainly the reduction of indirect taxation and subsidies on energy bills, is estimated to correspond to 0.7 per cent of GDP for 2022.

Government revenues are expected to grow at a slower pace in 2023, reflecting the slowdown in economic activity. However, the budget surplus is projected to reach around 1.1 per cent of GDP in 2023 and 1.6 per cent in 2024. The fact that the budget surplus is projected to remain broadly unchanged in 2023, despite the economic slowdown, is due to the projected reduction in the cost of measures to mitigate the effects of high energy prices to 0.1 per cent of GDP, as many of them are set to expire at the end of 2022. 

The debt-to-GDP ratio is expected to decline in the coming years due to expected growth in nominal GDP, combined with primary surpluses. According to the commission, Cyprus’ debt-to-GDP ratio is expected to reach 89.6 per cent by the end of 2022, before falling to 84 per cent in 2023 and 77.7 per cent in 2024.

Source: Cyprus Mail

Cooperation Partners
  • Logo for Cyprus Chamber of Commerce and Industry
  • Logo for Cyprus International Businesses Association
  • Logo for Love Cyprus Deputy Ministry of Tourism
  • Logo for Association of Cyprus Banks
  • Logo for Invest Cyprus
  • Logo for Cyprus Shipping Chamber
  • Logo for CYFA Cyprus
  • Logo for Cyprus Investment Funds Association
  • Logo for Ministry of Energy, Commerce, Industry and Tourism