Cyprus could see a 6.2 per cent drop in GDP in 2020 amid the coronavirus fallout and risks a prolonged economic downturn because of the high pre-crisis public and private sector debt, according to the European Commission Autumn Forecast, which was published on Thursday.
The Commission said the relatively contained epidemiological situation on the island allowed for a gradual relaxation of measures, which gave way to a gradual recovery of domestic demand over the summer.
“However, growth in the fourth quarter is set to slow down, as economic sentiment and consumer confidence remain low and the epidemiological situation in Cyprus and its main trading partners is worsening. For the year 2020 as a whole, GDP growth is forecast to fall by 6.2 per cent.”
The Commission expects growth to pick up next year – 3.7 per cent and 3 per cent in 2022, when output is expected to slightly exceed its pre-pandemic level.
“The recovery is expected to be driven by domestic demand. Private consumption is set to rebound due to pent up demand,” the Commission said.
Investment is expected to partially recover thanks to ongoing tourism-related projects although demand for high-end residences is set to slow down due to the abolition of the investor citizenship scheme.
The broad utilisation of the temporary income support schemes has helped to keep unemployment at low levels so far.
The Commission warned that the high pre-crisis public and private debt raises the “risks of a prolonged economic downturn. The planned expiration of loan payment moratoria at the end of the year, with a sizeable take-up by the tourism industry point to challenges ahead.”
The potential impact of the Cypriot Resilience and Recovery Plan on growth remains an upside risk.
The Recovery and Resilience Facility will make around €672bn in loans and grants available to support reforms and investments undertaken by member states.
The aim is to mitigate the economic and social impact of the coronavirus pandemic and make European economies and societies more sustainable, resilient and better prepared for the challenges and opportunities of the green and digital transitions.