EU, Cyprus economies suffer a winter of discontent

Cyprus will see economic growth at the same, relatively low rate of most EU Member States in 2021. There is, however, “light at the end of the tunnel,” according to an EU Commission report.

For the EU as a whole, GDP growth for the year 2021 is forecast at 3. 9 per cent, according to the Winter (Interim) Economic Forecast and Cyprus output is expected to improve 3.2 per cent – the report was released by the European Commission Directorate-General for Economic and Financial Affairs on Tuesday.

“The near-term outlook for the European economy looks weaker than expected last autumn, as the pandemic has tightened its grip on the continent. The resurgence in infections since the autumn, together with the appearance of new, more contagious variants of the coronavirus, have forced many Member States to reintroduce or tighten containment measures. The European economy is thus expected to have ended 2020 and started the new year on a weak footing,” the report explains.

As the vaccination rollout proceeds, and containment measures relax, activity is expected to pick up, “still moderately in the second quarter, but more vigorously in the third, led by private consumption with additional support from global trade,” according to the forecast.

Domestic demand has been the driver for a large part of GDP improvement, but much of it is still pent up in most EU Member States, the report points out. There was a strong recovery in consumer spending in the third quarter of 2020, fueled partly by governments’ support for the economy, but this was snuffed out by the lockdowns near the end of the year.

The forecast, however, sees this as a clear indication that pent-up demand will be released in 2021, with EU GDP growth rising to 3.8 per cent. Cyprus, however, is expected to see a slower recovery, with output growth only reaching 3.1 per cent in that year.

For Cyprus, according to the forecast, “the recovery is expected to take place mainly in the second half of 2021. Domestic demand is again expected to be the main contributor to growth. Policy measures adopted to mitigate the impact of the crisis have been extended into 2021, and some of them, such as the loan repayment moratorium, are planned to remain in place at least until June 2021. These measures should continue to support employment and household incomes.”

Government debt in Cyprus is forecast to decline from about 120 per cent of GDP to 90 per cent as the recovery accelerates.

Construction is expected to revive in 2022, and overall exports are expected to see growth as foreign markets also recover, the forecast notes.

But unemployment remains a fraught question.

“There is also a risk of deeper scars in the fabric of the European economy and society inflicted by the protracted crisis, through bankruptcies, long-term unemployment, and higher inequalities,” the report warns.

In Cyprus, unemployment has been little-changed for the past three months, hovering at about 8 per cent according to Cystat statistics. This is certainly due to government support for businesses.

But the forecast notes that there is “too much uncertainty” to make any clear prediction about unemployment both  for Europe as a whole, or for Cyprus.

According to a separate report by the European Economic Advisory Group released on Monday, forecasts that the unemployment rate will rise to 9.3 per cent for the EU as a whole in 2021.

“The unemployment rate is likely to have averaged 8.0 per cent last year for the EU as a whole, only slightly higher than in 2019 (7.6 per cent). This overlooks the strong dynamics in both 2019 and last year. The sustained decline in 2019 was abruptly reversed into a steep increase in 2020 caused by the pandemic . This upward trend will not be broken until GDP picks up sustainably. Spare capacities, as also reflected in the high number of short-time workers, will slow the recovery of the labour market. For this reason, unemployment is expected to rise to an average of 9.3 per cent in the euro area this year.”