articles | 15 February 2024

Cyprus GDP expected to grow, inflation to continue decreasing

Cyprus is expected to experience further growth in its Gross Domestic Product (GDP) in 2024, combined with a slowdown in inflation, according to the European Commission’s interim winter forecast.

This positive outlook was primarily attributed to strong domestic demand, strategic investments, and lower energy prices, despite broader economic challenges in the EU and the eurozone. According to the commission’s interim winter forecast, Cyprus’ GDP is expected to rise by 2.8 per cent in 2024, before increasing yet again by 3 per cent in 2025. Additionally, there is a forecasted slowdown in inflation to 3.9 per cent for 2023, down from 8.1 per cent in 2022, primarily due to lower energy prices, and it is expected that inflation will be further contained to 2.4 per cent in 2024 and 2.1 per cent in 2025.

According to the forecasts, as detailed in the text presented today by the commission, domestic demand is projected to remain the main driver of GDP growth in the next two years. This growth comes as the adjustment of wages for half of the workers helps to restrain their purchasing power. Meanwhile, growth is also expected to be strengthened through the investments planned with support from the Recovery and Resilience Mechanism.

Economy Commissioner Paolo Gentiloni, who unveiled the winter forecast at a press conference in Brussels, remarked that the European economy is entering 2024 on a somewhat weaker footing than previously predicted, after experiencing sluggish growth in the preceding year. More specifically, the interim forecasts have revised the growth for 2023, both in the EU and the eurozone, to 0.5 per cent from the 0.6 per cent projected in the autumn forecasts. Moreover, the forecasts for 2024 have been adjusted to 0.9 per cent (from 1.3 per cent) in the EU and to 0.8 per cent (from 1.2 per cent) in the eurozone. Nevertheless, the commission maintains its optimism for an increase in economic activity in 2025, predicting growth of 1.7 per cent in the EU and 1.5 per cent in the eurozone.

In terms of inflation at the European level, it is expected to slow down, faster than previously anticipated in the autumn forecasts. Specifically, in the EU, inflation based on the Harmonised Index of Consumer Prices (HICP) is forecasted to decrease from 6.3 per cent in 2023 to 3.0 per cent in 2024, and further to 2.5 per cent in 2025. In the Eurozone, inflation is projected to slow from 5.4 per cent in 2023 to 2.7 per cent in 2024, and to 2.2 per cent in 2025. Focusing on the forecasts for Cyprus, the commission predicts an increase in the real GDP of Cyprus by 2.8 per cent in 2024 and by 3 per cent in 2025, a forecast that is higher than the Autumn Forecasts for both years.

There has also been a slight improvement in economic sentiment among consumers and businesses in January 2024, with domestic demand expected to continue to be the main driver of real GDP growth in both 2024 and 2025. This is because the automatic wage adjustment for approximately half of the workers (covered by collective agreements in the public and private sectors) reduces their purchasing power. The commission anticipates a boost to growth from major investment plans in the real estate, health, transport, and tourism sectors, partially supported by the Recovery and Resilience Mechanism.

On the contrary, the contribution of net exports to the economy is expected to remain weak, due to the continuing economic uncertainty in Cyprus’ main trading partners and due to the strong demand for imports as a result of investments. Regarding HICP inflation, the commission anticipates it slowing to 3.9 per cent in 2023, down from 8.1 per cent in 2022, a slowdown that mainly reflects lower energy prices.

For 2024 and 2025, inflation in Cyprus is expected to be contained at 2.4 per cent and 2.1 per cent respectively, if the decline in energy and other basic commodity prices continues as expected. In contrast, the wage adjustment is expected to apply some upward pressure on HICP inflation excluding energy and food. Compared to the autumn forecasts, the commission revises its inflation forecast for 2024 downward but keeps its forecast for 2025 broadly unchanged.

In the first three quarters of 2023, real GDP growth slowed to 2.5 per cent year-on-year, compared to 5.8 per cent in the same period in 2022, mainly due to lower external demand for non-tourism services. However, it is noteworthy that demand for tourism services continued to recover in 2023, with arrivals increasing by 20.1 per cent to nearly reach pre-pandemic levels. Private consumption remained robust, supported by increases in real wages and continued employment growth of 1.6 per cent. For the whole of 2023, economic activity has recorded a growth of 2.4 per cent, slightly higher than the estimated in the 2023 autumn forecast, after having recorded growth of 5.1 per cent in 2022. At the European level, growth is expected to pick up in 2024 after a weak start to the year, as 2023 was marked by the erosion of household purchasing power, sharp monetary tightening, the partial withdrawal of fiscal support, and a decline in foreign demand. The outlook for the EU economy in the first quarter remains subdued after narrowly avoiding a technical recession in the second half of 2023.

Despite challenges, economic activity is anticipated to persist and gradually increase throughout the year. This optimism is grounded in the ongoing decline in inflation, an increase in real wages, and a robust labour market, all of which are expected to bolster consumption recovery. Investments are also expected to benefit from the gradual easing of credit conditions and the implementation of the recovery program, despite the reduction in profit margins, and are anticipated to benefit from the expected normalisation of international trade.

Regarding inflation, the decline in headline inflation in 2023 was faster than expected, mainly due to lower energy prices. As economic activity slowed, the easing of price pressures in the second half of last year spread to other goods and services. Lower-than-expected inflation results in recent months, lower energy commodity prices, and weaker economic momentum have put inflation on a faster downward line than anticipated in the autumn outlook.

In the short term, however, the end of energy support measures in all member states and higher shipping costs due to the situation in the Red Sea are expected to exert some upward pressure on prices, without derailing the deflationary process. By the end of the forecast horizon, headline euro area inflation is expected to be slightly above the European Central Bank’s target, with EU inflation slightly higher. The forecasts are noted to be subject to uncertainty due to the prolonged geopolitical tensions and the risk of further expansion of the conflict in the Middle East.

The rise in shipping costs, prompted by trade disruptions in the Red Sea, is projected to exert only a slight influence on inflation. Nevertheless, should these disruptions persist or worsen, they may trigger additional supply chain issues, potentially decreasing output and pushing prices upward. Domestically, risks to core growth and inflation forecasts are linked to whether consumption, wage growth, and profit margins turn out to be lower or higher than expected, as well as how high interest rates remain and for how long.

Finally, the commission noted that climate risks and the increasing frequency of extreme weather events also remain a threat.

Source: Cyprus Mail

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