The Central Bank of Cyprus said it expects the economy to expand 3.8 per cent this year before growth slowed down to 3.4 per cent in 2018.
By 2020, growth is expected to gradually drop to 3.1 per cent, the central bank said in its economic bulletin, published twice a year.
The bank supervisor, which revised its June forecast upwards by 0.7 percentage points citing a “better than expected economic performance (reflected in) the course of all major productive sectors” said growth is expected to reduce unemployment to 9.8 per cent next year, from 11.5 per cent in 2016. The jobless rate is expected to drop gradually to 7 per cent by 2020.
The harmonised inflation rate is expected to accelerate to 1.3 per cent next year and in 2019 before reaching 1.6 per cent 2020 from 0.8 per cent in 2017 and minus 1.2 per cent last year.
The Cypriot economy expanded 3 per cent in 2016 after emerging from a prolonged recession the previous year recording 2 per cent growth.
Finance minister Harris Georgiades said on December 1 he expects the economy to expand 4 per cent this year and growth to exceed 3 per cent in 2018.
“In 2017, private consumption is expected to increase 2.2 per cent after growing 3.3 per cent last year reflecting mainly an increase in disposable income, historic low interest rates, tax relieves and the reduction of immovable property tax, and improvement in employment and salaries,” the central bank said. Private consumption is expected to increase 2 per cent in 2018 and continue to rise at the same pace until 2020.
Public consumption is expected to increase 3.1 per cent this year after falling 0.4 per cent in 2016, attributed partly to the increase in the number of professional soldiers in the National Guard, the central bank said. Public consumption is expected to increase 1 per cent next year and 1.9 per cent and 0.8 per cent in 2019 and 2020 respectively.
Exports of goods and services which increased 3.9 per cent in 2016, is expected to drop slightly this year and rise 4.4 per cent next year. Imports are expected to increase 0.6 per cent this year after and 3.9 per cent in 2018.
The central bank said a slower than expected decline of non-performing loans, considered the banks’ main problem, could negatively affect economic growth as it threatens the further decrease of private debt.
Further downside risks are related to Brexit, and in particular to a deterioration of external demand for services, as a result of an unfavourable situation for the UK economy, the central bank said. While certain sectors, including tourism, could be affected, any impact would be manageable.
Upside risks are related to a faster than expected implementation of investment projects, including the operation of a casino resort in Limassol and other satellite resorts in other towns, the central bank said. Also, the completion of other investment projects, including university, research and transport infrastructure, could improve the macroeconomic environment.
The central bank also added that an increase in lending and the use of EU structural funds could lead to a further increase in investment in the private sector while investment in the exploitation of hydrocarbons could further improve macroeconomic prospects.