By George Psyllides
THE Cypriot economy is not expected to return to growth before 2017, according to a winter Eurozone Forecast put together by professional services firm Ernst and Young, made public yesterday.
“After falling by an estimated 7.4 per cent in 2013, Cyprus’ GDP is forecast to shrink by a further 8 per cent in 2014 and 2.7 per cent in 2015, against a backdrop of shattered consumer and investor confidence, soaring unemployment, and a credit crunch,” EY said.
EY predicted that the economy was not expected to return to growth before 2017, at which stage economic activity would be 20 per cent lower than the pre-crisis peak.
Unemployment, the forecast said, was expected to rise to 25 per cent.
Meanwhile, soaring unemployment could undermine fiscal consolidation efforts by cutting tax revenues and forcing up social transfers.
“The outlook for investment is even bleaker. Inevitably, much of the fiscal consolidation efforts have fallen on public investment, but private investment is also plunging in response to the near-meltdown of the banking sector in March 2013,” EY said.
With deposits continuing to decline and non-performing loans at very high levels, it will be some time before conditions in the financial sector stabilise and the remaining capital controls can be lifted, the forecast said.
“Until conditions improve, banks will have very little appetite to lend new money to any but the very safest companies.”
In addition, the economy and financial system would be completely destabilised if Greece abandoned its efforts to remain in the eurozone.
However, a glimmer of hope is offered by the country’s gas reserves, which are expected to boost investment and exports in the long term. Preliminary reports place the gross value of these reserves at US$50b, approximately three times Cyprus’ GDP.
The forecasts and analyses presented in the EY Eurozone Forecast are based on the European Central Bank’s model of the eurozone economy.