Cyprus’ GDP growth is expected to reach 3.8% in 2018 following 4.2% in 2017, according to the winter interim economic forecast issued on Thursday by the European Commission.
According to the forecast, GDP growth is expected to reach 3.3% in 2019 and 2.7% in 2020.
Meanwhile inflation is expected to be 0.8% for 2018, 0.7% for 2019 and 1.2% for 2020.
In 2019 and 2020, growth is projected to slow down to 3.3% and 2.7%, due to the less favourable external environment.
“Slowing growth in the euro area and persistent uncertainties in major trading partners weigh on Cyprus’ outlook and increase downside risks,” warns the European Commission.
According to the Commission, “Cyprus’ economy grew strongly in the first three quarters of 2018, although real GDP growth in the third quarter (3.7% y-o-y) was the lowest of the year” and “economic sentiment rebounded in the fourth quarter after a soft patch in the second and third”.
“The labour market continues to perform strongly,” the forecast reads, as employment increased by 3.7% (y-o-y) in 2018-Q3 and compensation per employee by 1.9% (compared to 0.7% in 2017). Survey data signalled that the construction sector continued hiring in the fourth quarter.
But the report states that “despite rising household income, consumer confidence dipped, influenced by the sale and winding down of the Cyprus Cooperative Bank. The bank was the second largest in the country and held many household and SMEs deposits”.
According to the Commission, “employment gains and higher wages are expected to boost disposable income and to support private consumption”.
Public consumption is also expected to grow “amid rising wages and employment in the public sector”. Investment should make a “positive contribution in 2019 on the back of strong construction activity,” the report said.
Finally, inflationary pressures remain very weak. Consumer price inflation stood at 0.8% in 2018, only marginally higher than a year before. Inflation accelerated in the second half of the year, driven by energy and unprocessed food prices. Core inflation throughout 2018 fluctuated around zero, as moderately higher prices of services were offset by falling prices of non-energy industrial goods.
Over the coming quarters, two opposing forces will be at play: rising disposable income, which will fuel price pressures; and lower oil prices, which will dampen them. Overall, headline inflation is expected to ease to 0.7% in 2019. As the impact of lower oil prices fades, inflation should pick up moderately in 2020 to 1.2%.