Economic activity in Cyprus contracted sharply in 2020, due to the Covid-19 crisis, though less than the EU average. The tourism sector has been severely affected, while the impact on domestic demand and the labour market has been cushioned by temporary income support measures.
Gradual recovery in economic activity is forecast for 2021 and 2022, driven mainly by domestic demand. Public finances worsened significantly in 2020 due to the crisis but are set to improve in 2021 and 2022.
These are some of the main findings of the spring economic forecast for Cyprus, presented on Wednesday in Brussels.
According to the European Commission, the economy shrank by 5.1 per cent in 2020. It is forecast to grow by 3.1 per cent and 3.8 per cent in 2021 and 2022. Unemployment was 7.6 per cent in 2020 and is seen at 7.5 per cent in 2021 and 7.2 per cent in 2022.
The report says that the impact on domestic demand has been only partially mitigated by the temporary income support measures as private consumption fell by 3.9 per cent in 2020 and investment by 2 per cent. Exports of goods and services dropped by 12.4 per cent, the latter reflecting the impact of travel restrictions on tourism.
A moderate recovery is forecast in 2021, with real GDP growth expected at 3.1 per cent. Lockdown measures in Cyprus during the first half of 2021, as well as ongoing restrictive measures in the rest of the EU affecting tourism flows, indicate that a durable recovery is expected to take place in the second half of 2021.
Domestic demand is expected to be the main driver of the recovery notably private consumption due to pent-up demand. Investment in construction is also expected to rebound as large-scale infrastructure projects continue and new lending for housing has picked up since the third quarter of 2020. By contrast, demand for high-end residences is set to slow down, following the abolition of the investor citizenship scheme.
The forecast for public investment in 2021 takes into account Cyprus’ Recovery and Resilience Plan (RRP), which will start to have a gradual impact this year. Public consumption is expected to also have a positive contribution, due to some of the support measures, which were extended into 2021 and the planned increases in compensation of employees.
External demand in particular for tourism is forecast to recover moderately, as member states are still tackling the pandemic and facing further restrictive measures, which negatively affected the demand for tourism for the Easter holidays and is likely to adversely impact also the summer tourist season.
In 2022, real GDP is forecast to grow by 3.8 per cent and exceed the output level of 2019. This will be mainly due to rising domestic demand, including the positive contribution of the RRP, as well as a small positive contribution from net exports. The unemployment rate increased only mildly to 7.6 per cent in 2020 from 7.1 per cent in 2019.
The broad utilisation of the temporary income support schemes – up to 65 per cent of eligible employees – has helped to keep unemployment at low levels so far. Targeted measures to sectors mostly affected by lockdown measures, especially the hospitality industry continue. In 2021 the unemployment rate is forecast to decrease only marginally to 7.5 per cent and further down to 7.2 per cent in 2022.
Uncertainty and downside risks to the growth outlook remain significant. The sizeable pre-existing private and public sector debt levels exacerbate the downside risks. On the positive side, the swifter-than-expected vaccination campaigns in the EU could be a significant benefit for the tourism sector in Cyprus.