“In 2016, domestic demand is forecast to shape growth, as the support to private consumption from low inflation is set to continue,” said the EC, referring to Cyprus.

“Investment growth, however, should slow, due to a negative base effect from the high number of ship registrations observed in 2015.”

The EC said the underlying momentum of investment is gathering strength, however, alongside the easing of credit supply conditions.

“The drag from falling inventories and public spending cuts will ease and thus provide some additional support to growth.”

Export growth is forecast to slow, as the positive impact from the depreciation of the euro looks set to weaken.

Unemployment is expected to decline to around 13% by 2017. “With unemployment still high and inflation expectations still subdued, wage growth should remain muted, in 2016 and 2017,” the EC said.

“High profit margins, reflecting weakened pass-through of lower unit labour costs on domestic prices, are set to result in only limited upward pressure on prices,” it added.

Energy price effect

As regards upside risks to the forecast the EC said that renewed weakness in energy prices and the effects previous euro depreciation could support consumption and exports more than expected.

On the downside, “the weakening of external demand and the sanctions against Russia could weigh more on activity than forecast.”

In the financial sector, the slow pace of reduction in the high level of non-performing loans could lead to a more prolonged period of tight credit conditions, which would dampen the recovery.

The EC expects fiscal adjustment to continue, with a primary surplus (balance excluding interest payments) of 2.6% of 2016 from an estimated 2.2% in 2015.

These numbers do not account for the cooperative recapitalisation of December 2015, as the size of the likely impact on fiscal accounts has to be assessed by Eurostat.

The debt-to-GDP ratio is projected to peak in 2015 at about 108% and to decline to 95% in 2017. The peak has been shifted from 2014 to 2015, as the debt-decreasing impact of certain initiatives is now expected to kick in only in 2016.

Source: InCyprus