The Cyprus economy is expected to expand by 1.3% in 2015, according to the University of Cyprus Economic Research Centre - ERC (photo) a much higher figure than the 0.5% forecast by the IMF.
In it October Economic Outlook ERC revised its latest projections for real GDP growth upwards, from 1.1% previously.
Noting quarterly growth of 0.8% in the second quarter, ERC said it expected year-on-year growth of 1.9% and 2.6% in the third and fourth quarters of 2015, respectively.
This would bring the annual growth rate for 2016 to 1.5%.
The ERC cites a number of factors that are supporting the recovery in Cyprus. The included accelerated year-on-year growth in employment, a positive direction for domestic leading indicators in the third quarter, stronger growth in the euro area and steady growth in the UK in the second quarter, as well as further increases in European economic sentiment indicators in the third quarter.
Recent reductions in domestic lending interest rates amid conditions of weak demand and high unemployment are facilitating the economic recovery, and the return of domestic economic confidence to pre-crisis levels combined with good fiscal performance are also expected to contribute to growth.
Lower international oil prices and inflation in the EU are expected to benefit economic activity in Cyprus through their effects on real incomes, and on both domestic and external demand, whereas the weakening of the euro against key currencies, most notably against the British pound, is expected to boost domestic activity in the following quarters through exports, particularly tourism services.
Further reductions in the European lending rates and in the borrowing costs of euro area governments (with the exception of Greece) reflect ECB’s accommodative monetary policy stance, which is also backing the recovery process in Cyprus, the ERC added.
However, the ERC said that downside risks to the Cypriot economy stem from the high level of non-performing loans, which pose major risks to the stability of the banking system and to the outlook for the economy.
“Ineffective implementation of the new insolvency and foreclosure legal framework and bottlenecks in the introduction of legislation for the sale of loans could delay the restoration of healthy credit conditions and economic growth,” the ERC said.
It also highlights delays in the implementation of structural reforms agreed in the economic adjustment programme (e.g. public administration, privatisations, health system).
These could create risks to public finances, Cyprus’s market borrowing costs and, therefore, to economic activity.
A deterioration of the external economic environment, namely the worsening of the outlook for the Greek economy, the downturn in Russia and weaker than expected growth in the euro area and the UK as a result of a slowdown in emerging markets, especially in China, could pose risks to the recovery momentum in Cyprus.
Upside risks to the economic outlook would be a longer period of lower oil prices with positive effects on consumption, limited negative spillovers from adverse economic developments in Greece due to the recent weakening of the connections between the Cypriot and Greek banking systems, and investment decisions linked mainly to tourism, energy and financial services as well as public investment efforts for the expansion/improvement of infrastructure.
Consumer price inflation in 2015 is projected at -2.1% (ie deflation), while in 2016 inflation is estimated to remain slightly below zero, mainly driven by the lower international oil prices combined with sluggish domestic demand.