According to the latest EY forecast, Cyprus’ economy has been surprisingly resilient to the near-meltdown of its financial sector and an aggressive austerity program.
The report says they still expect GDP to contract by 4.3% this year, with growth only resuming in 2016. And the recovery is likely to be very modest, given the considerable debt burden facing the private sector and the hangover from a severe credit crunch.
Solid progress has also been made on cleaning up the financial sector. Deposits have stabilized and the improving economic outlook encouraged the government to further ease capital controls. But major challenges remain, with the private sector still highly leveraged and non-performing loans still weighing on banks’ balance sheets.
Overall, the outlook remains uncertain and the risks are high. Headline consumer prices have been falling on an annual basis since October 2013, underscoring the threat of a period of sustained deflation that would jeopardize the economic recovery.
Although the baseline forecast is that Cyprus will avoid falling into such a deflationary spiral, growth would be adversely affected, particularly given the high levels of debt in the public and private sectors.