Cyprus Mail
Guest Columnist

Predictions for the Cyprus economy in 2019

Less than two per cent of the country’s workforce will be employed in the agricultural sector

By Barret Kupelian

There is something magical about predicting the future and getting it spot on. Forecasting – or making an educated guess on what the world will look like in the future – is fundamental for planning. For businesses and policymakers in particular, forecasting the economic (or other) outlook is what most long-term decision making is based on. They are also fun to do.

In this piece, I have made my own judgements on what lies ahead for the Cypriot economy. Importantly these are conditional forecasts – that is that they are subject to a set of more fundamental assumptions including the continuation of a stable political environment, broadly stable oil prices, that the UK doesn’t crash out of the EU – something which is looking more unlikely – and, that the European Central Bank’s (ECB) monetary policy is gradually tightened in line with its forward guidance. So here are my forecasts for the Cypriot economy for 2019.

In 2019, I expect the Cypriot GDP to expand by a factor of 2.5-3.5 per cent. Brexit is by far the biggest factor which could derail this. In absolute volume terms, Cypriot economic output will be at its highest level ever been. This will help push public debt levels below the 100 per cent relative to GDP assuming the government resists the elixir of handing our money to various lobbying groups for political gain.

Solid economic growth will translate into jobs. The number of people employed will push above the 400K mark, the highest level recorded in Cyprus. Strong economic growth will help convert some of 47k part-time jobs to full-time such that around 10 per cent of the overall number of jobs are part-time. Youth unemployment will continue to drop from a high of almost 39 per cent in 2013 to less than 20 per cent in 2019, which is equivalent to around seven thousand people.

Less than two per cent of the country’s workforce will be employed in the agricultural sector which I expect to contribute less than two per cent of overall GDP – in other words, the direct economic impact of the agricultural sector to the labour market and the economy as whole will be at its lowest level ever recorded. Despite this, our farmers will continue to absorb large amounts of subsidies from government when and if the weather turns sour. As far as gender is concerned, the agricultural and industrial/manufacturing type jobs will continue to be dominated by men. The services sector will be dominated by women.

Across the island the Nicosia district will generate the most jobs, especially in the professional services sector – the Paphos district is expected to generate the smallest number of jobs.

As the labour market continues to tighten and inflationary pressures start to build up in the Eurozone and the Cypriot economy, I expect wage growth to kick in at around two per cent, some of which will be eroded by the additional contributions made by employees towards the Cyprus national health scheme which will start this year. One of the ways to hit faster rates of wage growth is to make labour more productive. However, I expect labour productivity to continue to grow at dismal rates. Once the number of unemployed reaches a low enough level, businesses will probably resort to their usual “go to” measure to contain their costs – that of immigration either from Eastern Europe (which is slowly, yet surely, running out of workers) or from other third countries.

The combination of growing employment levels and wages means that household consumption will continue to be in the driving seat of economic growth – more so than net exports or government consumption. This will be good news particularly for our retail sector and especially for some of the newly opened malls. In a sign, however, of the next medium-term challenge retailers in Cyprus will face, online competitors like Amazon are gradually expected to become more dominant in the Cypriot market – I expect the number of parcels coming in from overseas exceeding the 2 million mark compared to 800k in 2013.

In 2019, we will also have a new governor of the Central Bank of Cyprus (CBC). However, everyone knows that the role of the governor is largely limited to that of bank supervision given that monetary policy has been delegated to the ECB. Despite a new governor being installed, the CBC’s reputation will continue to remain in tatters. Meanwhile, in Frankfurt, the appointment of Andrea Enria, the new chair of the ECB’s Single Supervisory Mechanism, will also coincide with a renewed effort on anti-money laundering efforts at the Eurozone level. The ECB, for example, will follow through its plans to set up an anti-money laundering (AML) office to collect and share information. Somehow, Cyprus could end up being caught off-guard on AML practices in the international press, even though processes have been tightened up.

But the final more depressing aspect of Cyprus’ future is that we won’t see any radical structural change to the way government and businesses work – partly because of a lack of willingness to change but also because bold and ambitious reforms take time to orchestrate and execute.

What about other factors which are expected to affect the economy indirectly? The Cyprus problem will remain unresolved. Our educational system will remain one of Europe’s worst in terms of value for money. Our kids will continue to remain one of the most overweight in Europe. And on the environment, road traffic will get worse. We already have more cars than we can handle. The government will erroneously spend more money on roads, highways and dual carriageways not realising that the real solution lies in changing the behaviour of commuters. We will continue to generate more CO2 per person than the UK, France, Italy, Belgium, Romania, Hungary and others, remaining in the EU’s Top 10 list of offenders even though we have plans to organise a conference on climate change with some of Middle Eastern economies.

So what is the conclusion of my predictions for 2019? That the economy will continue to hum along but that our political elite will be incapable to deal with some of the major challenges businesses and households are expected to face which is necessary if we want to keep up with our competition.

Barret Kupelian is a Cypriot consultant economist based in London

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