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Commission, finance ministry expect strong growth, see risks

By Stelios Orphanides

The European Commission said on Thursday it was expecting the Cypriot economy to grow 3.6 per cent this year and 3.3 per cent in 2019, slightly below the finance ministry’s forecasts also published today.

“Economic growth is expected to be strong, fuelled by foreign-funded investment and solid private consumption,” the Commission said in a statement on its website on Thursday. “Unemployment has fallen below 10 per cent and is expected to continue decreasing. Inflation remains very low and is set to stay moderate”.

“The budget surplus is projected to further improve, although risks to the fiscal outlook remain,” it added. “Public debt is expected to increase in 2018 but to decline again in 2019”.

The Commission’s forecast came hours after the finance ministry published its Stability Programme covering the period ending in 2021, in which it also said that it expects a strong growth for 2018 which will drop to 3.6 per cent next year and weaken gradually over the following years.

The European Commission said it expects the unemployment rate to drop from 11 per cent last year to 9 per cent this year and 7.1 per cent in 2019. The ministry of finance on the other hand is more reserved with its unemployment forecasts, expecting the jobless rate to fall to 9.5 per cent in 2018 before falling to 8 per cent in 2019.

The European Commission said that it expects the “subdued” harmonised inflation rate to remain unchanged at 0.7 per cent this year as in 2017 before it accelerates to 1.2 per cent in 2019. The finance ministry on the other hand, expects the both the national and harmonised consumer price index to increase only 0.5 per cent this year before accelerating to 1 per cent in 2019.

“Recent developments in the financial sector have widened the risks to the outlook,” the Commission said in reference to last month’s issue €2.35bn in bonds by the government in an attempt to soothe Cyprus Cooperative Bank depositors’ concern amid uncertainty over the lender’s future, following its decision in March to put its operations up for sale.

“Tourism faces both upside and downside risks,” the Commission continued. “While the recently expanded air transport and accommodation capacity brightens the sector’s prospects, the reopening of neighbouring markets for this season increases competition. At the same time, even stronger investment than currently foreseen and advancement of gas exploration projects could further support the outlook in the short to medium term”.

The EU Commission added that it expects the government which last year posted a fiscal surplus of 1.8 per cent of the economy to continue generating more revenue than what it spends. This year’s budget will produce a surplus of 2 per cent which will increase to 2.2 per cent next year, it added.

In the Stability Programme, the finance ministry is more conservative in fiscal forecast expecting a budget surplus 1.7 per cent of gross domestic product (GDP) both this and next year.

The bond issue in favour of the Co-op, into which the government had injected in 2014 and 2015 €1.5bn and €175m in fresh capital, will increase Cyprus’s government debt to 105.7 per cent of GDP before it falls to 99.5 per cent next year, the Commission said. The finance ministry expects public debt to rise to 105.7 this year from 97.5 per cent in 2017 before it falls to 94.6 per cent next year.

“Downside risks to public finances stem from the absence of a mechanism regulating public sector payroll growth from 2019 onwards, the potential additional costs of the national health system reform and the contingent risks from the high proportion of non-performing loans in the banking sector,” the Commission commented. “The forecast is also subject to uncertainties on the budgetary impact of the government’s transaction on 3rd April 2018 related to the Cyprus Cooperative Bank”.

The ministry said that downside risks for the economy are seen in the possible outcome of Brexit negotiations, a probable faster than expected rebound of oil prices, a negative impact on economic growth in Europe resulting from US policy, amid fears of a trade war erupting after US President Donald Trump announced his intention to impose tariffs on steel. In addition, the performance of the Russian economy, and a probable impact on it from the already deteriorated relations to the West, may also affect the Cypriot economy negatively via a weaker Russian currency.

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