“Real growth is expected to reach 2.8% in 2016 and then to moderate gradually to 2.3% in 2018,” the European Commission said in its autumn forecast on Wednesday. “The 2017 to 2018 growth forecast is driven by private consumption and investment, the latter benefitting from a stabilising housing market. Growth in the tourism sector is forecast to continue, albeit less buoyantly”.

The Commission said that growth is likely to help bring down unemployment gradually from 15% last year to 12.5% in 2016 and 11.1% next year and put so upwards pressure on wages and unit labour costs. The harmonised inflation rate will rise from -1.5% last year to -1.1% in 2016 before prices rise 0.7% next year, it said.

The Finance Ministry forecasts that the Cypriot economy, which emerged last year from a prolonged recession, will expand at a rate “close to 3%” this year and 2.8% in 2017.

The Commission said that Cyprus’ economy could grow faster than forecast as a result of lagged effects from the recent drop in energy prices and additional consumption generated by higher incomes and on an increased flow of foreign direct investment. “Moreover, the performance in the tourism sector could turn out stronger than forecast,” it said.

“On the downside, risks stemming from main trading partners and negative spill-overs from the UK’s referendum to leave the EU could weigh more on activity than forecast,” it said. “In the financial sector, the slow reduction in non-performing loans could lead to a more prolonged period of tight credit conditions, which would dampen the recovery”.

The euro area’s economy which expanded last year 2% is forecast to grow 1.7% this year and 1.5% next year before growth picks up at 1.7% in 2018, the Commission said. The EU economy will see growth rate slow down to 1.8% in 2016 and 1.6% next year form 2.2% in 2015.

The UK’s economy which grew last year 2.2% will grow this year 1.9% while growth will slow down to 1% next year before it accelerates to 1.2% in 2018, the EU’s economists said. Germany’s economy, the euro area’s largest, is forecast to grow 1.5% in 2017 and 1.7% the year after compared to 1.7% last year and a projected 1.9% in 2016.

The Commission said that Cyprus’ government will generate this year a fiscal deficit of 0.3% of economic output and a 0.4% gap next year compared to a budget shortfall of 1.1% in 2015.

“In 2018, the small improvement in the general government primary surplus is largely based on the improving economic outlook,” the Commission said. It added that “despite the stable headline balance, the structural balance is expected to worsen over the forecast horizon”.

The reference to the worsening structural balance comes just 15 days after the Vice-President of the European Commission Valdis Dombrovskis, in charge of financial stability, and Economic and Financial Affairs Commissioner Pierre Moscovici, warned Cyprus of fiscal relaxation, prompting a strongly worded reaction by finance minister Harris Georgiades.

The two commissioners said in their letter to the finance minister that the draft budget submitted by Cyprus to European Union institutions provides for a deterioration of the net structural balance compared to potential gross domestic product, from a surplus of 1.5% of gross domestic product in 2015 to a 0.1% deficit this year and a 2% deficit next year.

In the autumn forecast, the Commission revised its structural budget balance forecast to a surplus of 0.2% this year and gap of 1.3% of GDP in 2017.

Government debt is expected to gradually drop from 107.5% of the economy in 2015 to 107.1% this year and 103.7% next year and remain above the 100% mark in 2018, the Commission said. The finance ministry expects public debt to drop from 101.7% by 2018.

Source: Cyprus Mail