THE recession in Cyprus will get worse before it gets better although the state should focus on structural reforms rather than austerity, a report by the University of Cyprus’ Economics Research Centre (CypERC) concluded yesterday.
In its October 2013 report, CypERC forecast a 7.0 per cent contraction of the economy in the third quarter of this year and an 8.1 per cent contraction in the fourth quarter of 2013. Risk factors include limited liquidity and relatively high interest rates that could lead to higher than anticipated default rates for households and businesses, while in the event the government misses fiscal targets a further reduction in benefits would negatively impact disposable income, the report said.
CypERC said its projections for a 14.5 per cent contraction in GDP in 2013-2014, larger than the 12.6 per cent contraction forecast in Cyprus’ economic adjustment programme, could have negative implications for fiscal targets, debt sustainability and businesses and households’ ability to meet debt obligations.
Authorities must implement structural reforms, looking to the long-term health of public finances, the market and the banking sector, the report said.
“Further austerity measures based on accounting principles and designed to balance the government books can only have a short-lived effect and can do very little to stop the economy from slipping deeper into recession,” CypERC said.
The research body said a big part of the economy’s adjustment was likely to be shifted to 2014. “The introduction of reforms at this critical point for the economy will strengthen the country’s credibility and investor confidence and will ultimately improve the recovery prospects,” the report said.