The University of Cyprus said its economic growth forecast for this year remained unchanged at 3.6 per cent, after the economy expanded in 3.8 per cent in 2017, the highest growth rate in eight years.
Economic activity is expected to expand 3.7 per cent in the first half of the year before slowing down to 3.5 per cent later on, the Economic Research Centre (ERC) of the Nicosia-based university said in an emailed statement on Tuesday.
In November, the ERC predicted that the economy would grow 3.6 per cent in 2018, the same as in 2017.
“The main factors driving the strong growth rates forecasted in the next five quarters include the solid improvements in domestic activity and labour market indicators in recent quarters, the steady upward trend in the level of the domestic economic sentiment indicator, the favourable external economic environment, and the subdued inflation rates,” the ERC said.
The recent “strong fiscal performance,” the current record-low interest rates, the improved liquidity in the banking system reflected in an increase in deposits and an ongoing deleveraging, are also seen as positive domestic developments which contributed to this year’s economic outlook, the centre said.
“Downside risks to the growth forecasts include sluggish progress in the management of non-performing exposures, ineffective resolution of problematic loans, and lack of momentum in completing pending and launching new structural reforms,” the ERC added. “These risks, which stem from the high levels of private debt and non-performing loans, and the high public debt relative to the size of the economy, could limit growth prospects by undermining economic confidence, financial stability and fiscal sustainability”.
Factors related to the June 2016 decision of British voters to leave the European Union, which in turn threw the economy of the UK, Cyprus’s largest source of incoming tourism, into uncertainty, may also negatively affect growth, according to the ERC.
“Slower-than-expected growth in the UK, the uncertainty effects of Brexit, and a weaker pound could also have adverse effects on growth,” it said.
On the other hand, implementation of public investment projects in infrastructure and private investment projects in energy, tourism, and real estate, could help the economy grow even faster, the ERC said. Cyprus’s economy would also benefit if those of the EU and Russia perform better than anticipated.
“The more optimistic outlook in this bulletin against the November issue, is mainly the result of upward revisions of the gross domestic product (GDP) data — at constant price s– for the period between the first quarter of 2015 and the second quarter of 2017,” it continued. “The positive developments in domestic macroeconomic and leading indicators, and the favourable external economic conditions during the second half of 2017 have also contributed to the upward revision of the forecast”.