Cyprus Mail
Business Cyprus

Recession could end next year (updated)

By Angelos Anastasiou
CYPRUS’ economic recovery is forecast to level out in 2014 before coming full circle in 2015, according to the European Commission’s winter forecast.
The Directorate General for Economic and Financial Affairs published its Winter 2014 Forecast for individual European Union (EU) countries on Tuesday, predicting a continuation of recovery in most member states and the EU as a whole.
Though lacklustre, growth in Europe had resumed since the middle of 2013 following a year of contraction in 2012.
Olli Rehn, Commission Vice-President for Economic and Monetary Affairs and the Euro said that “recovery is gaining ground in Europe, following the return to growth in the middle of last year.”
“The worst of the crisis may now be behind us, but this is not an invitation to be complacent, as the recovery is still modest,” he said, adding that “to make the recovery stronger and create more jobs, we need to stay the course of economic reform.”
According to the report, the Cyprus recession is expected to ease in 2014 at 4.8 per cent before the economy returns to growth, projected to mark a – modest, yet significant – 0.9 per cent growth rate in 2015.
By the end of 2013 the Cyprus economy was expected to have shrunk by 6.0 per cent, a significant improvement on the Commission’s prior forecast in Autumn 2013, which was 8.7 per cent – however, according to the most recent available data, the island appears to have managed an even lower rate of contraction for the year, now estimated at 5.8 per cent.
Abruptly tightened liquidity and declining labour market conditions notwithstanding, reasons cited in the forecast report by way of explaining the economy’s better-than-anticipated performance are strong tourism and professional services industries, as well as a decline in domestic consumption that was less than expected.
This finding comes on the back of yesterday’s announcement by Tourism minister Giorgos Lakkotrypis that the tourism industry contributed some €2.1 billion in 2013, translating to an increase of 9.0 per cent in revenue compared to 2012.
Nonetheless, the drop in domestic consumption sparked a decline in imports, which in turn helped ease the contraction.
Though the recession is projected to continue in 2014 as a result of continuing issues of availability of credit and downward wage adjustments, its magnitude is expected to further contract to 4.8 per cent. Unemployment during this year is expected to peak at slightly over 19 per cent, before anaemically starting to fall in 2015.
The streak of negative economic growth is expected to be reversed in 2015, mainly due to the planned deleveraging of both household and corporate debt, impacting both imports and exports positively.
Effective fiscal consolidation efforts undertaken thus far have contributed to the revision of the projected government deficit – previously forecasted at 8.3 per cent – to 5.5 per cent.
Declines in both employment and wages are expected to adversely impact the deficit, forecasted at 5.8 per cent in 2014 courtesy of lower direct taxes to be collected on lower incomes on the one hand, and lower indirect taxes to be collected as a result of declining private consumption on the other.
The general government deficit is expected to further increase to 6.1 per cent in 2015.
A press release accompanying the forecast acknowledges the threat of what Rehn termed ‘complacency’, and makes the argument that reforms to national systems and institutions must plough ahead at full speed, or risk testing the resilience of Europe’s economic health.
“The largest downside risk to the growth outlook is a renewed loss of confidence that could stem from a stalling of reforms at national or European level,” the statement said.
“This would increase the likelihood of an extended period of weak growth in Europe with a negative impact on economic activity over the forecast horizon.”


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