articles | 06 May 2014

EC expects Cyprus to exit recession in 2015

The European Commission’s spring forecast confirms that Cyprus economic adjustment is on the right track and that the island will exit recession in 2015.

According to the Commission, GDP stood at -5.4% in 2013, while the forecast in November was -8.7% and -6% in February. 

For 2014 the GDP is expected to be reduced at -4.8%, while 2015 will mark the exit from recession and the return to development with the GDP reaching 0.9%. 

The public deficit was estimated at -5.4% in 2013, while the Commission’s forecast in November 2013 was -8.3% and for February -5.5%. 

In 2014 it is estimated to reach -5.8% and in 2015 -6.1%. The public debt is estimated at 111.7% in 2013, while for this year it is estimated at 122.2% and in 2015 at 126.4%. Recession will lead to further increase of unemployment from 15.9% in 2013 to 19.2% in 2014, while in 2015 it will be reduced to 18.4% of the active population. 

Inflation stood at 0.4% in 2013 and is expected to remain at the same level this year, while in 2015 it will reach 1.4%. 

The European Commission’s spring forecast points to a continuing economic recovery in the European Union following its emergence from recession one year ago. Real GDP growth is set to reach 1.6% in the EU and 1.2% in the euro area in 2014, and to improve further in 2015 to 2.0% and 1.7% respectively. 

According to the Commission, the forecast rests on the assumption that the agreed policy measures will be implemented by Member States and the EU, taking forward the necessary adjustment.

Siim Kallas, Commission Vice-President said: “The recovery has now taken hold. Deficits have declined, investment is rebounding and, importantly, the employment situation has started improving. Continued reform efforts by Member States and the EU itself are paying off.” 

According to the Commission, overall, domestic demand is expected to become the key driver of growth over the forecast horizon. Consumer spending should progressively add to growth as real income benefits from lower inflation and the stabilising labour market. The recovery in investment should continue to support growth, with gains in both equipment and construction investment.

The contribution of net exports is expected to diminish over the forecast horizon. The gradual nature of this upturn is in line with previous recoveries following deep financial crises. While financing conditions remain benign on average, substantial differences persist across Member States and across firms of different size. 
Labour market conditions started to improve in the course of 2013 and more job creation as well as a further decline in unemployment rates should follow (to 10.1% in the EU and 11.4% in the euro area in 2015). 

Inflation is expected to remain low, both in the EU (1.0% in 2014, 1.5% in 2015) and in the euro area (0.8% and 1.2%). Current account deficits in vulnerable Member States have been reduced in recent years following continuous price competitiveness gains. In a number of these economies surpluses are expected in 2014 and 2015. 

The reduction in general government deficits is set to continue. In 2014, a decrease is projected to around 2½ % of GDP in both the EU and the euro area. The debt-to-GDP ratio will peak at almost 90% in the EU and 96% in the euro area before falling next year. 

The largest downside risk to the growth outlook remains a renewed loss of confidence from a stalling of reforms.Also, uncertainty about the external environment has increased. On the other hand, further bold structural reforms could lead to a stronger-than-envisaged recovery. 

While current price developments reflect both external factors and the on going adjustment process, a too prolonged period of low inflation could also entail risks. However, the gradually strengthening and increasingly broad-based recovery should mitigate these risks.

Source: Financial Mirror

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