GDP expected to grow in 2022 and 2023

The European Commission predicts a 4.1 per cent increase for the real GDP of Cyprus in 2022 and a 3.5 per cent increase in 2023, in its Winter 2022 Economic Forecast which was published on Thursday.

Regarding inflation in Cyprus, the Commission forecasts a further increase to 2.6 per cent in 2022, before the inflation rate moderates to 1.2 per cent in 2023.

On the EU’s economy in general, the Winter Economic Forecast projects that, following a notable expansion by 5.3 per cent in 2021, the EU economy will grow by 4.0 per cent in 2022 and 2.8 per cent in 2023. Growth in the euro area is also expected at 4.0 per cent in 2022, moderating to 2.7 per cent in 2023.

The EU as a whole reached its pre-pandemic level of GDP in the third quarter of 2021 and all Member States are projected to have passed this milestone by the end of 2022.

After the robust rebound in economic activity that started in spring last year and continued unabated through early autumn, the growth momentum in the EU is estimated to have slowed to 0.4 per cent in the last quarter of 2021, from 2.2 per cent in the previous quarter.

The forecast for inflation has also been considerably revised upwards compared to the Autumn Forecast. This reflects the effects of high energy prices, but also the broadening of inflationary pressures on other categories of goods since autumn.

In its chapter on Cyprus, the Winter Economic Forecast notes that after the sharp contraction in 2020, real GDP rebounded in 2021, but “the third quarter of 2021 came out slightly lower than expected in the autumn forecast, by 1.5 per cent quarter-on-quarter”.

Meanwhile, “real GDP increased by 5.3 per cent in the first three quarters of 2021 compared to the same period last year”.

The main driver of growth in Cyprus “was domestic demand, underpinned by fiscal stimulus, as well as exports of services including tourism”.

“In the period January-October 2021, receipts from tourism continued to regain lost ground and reached 53 per cent of the 2019-level for the same period” the report adds.

The Commission adds that “despite the high rise of infections at the end of 2021 and beginning of 2022, economic sentiment among consumers and businesses remained high” while on an annual basis “real GDP growth is expected to increase by 5.3 per cent in 2021”.

“The recent surge of infections and the erosion of consumers’ purchasing power due to high inflation is expected to somewhat dampen growth in the first quarter of 2022” the report points out.

However, the expansion of the economy “is expected to resume in the second quarter, supported by the high vaccination rate for the adult population and the expected containment of COVID-related restrictions”.

Furthermore, the prospects for the tourism season are projected by the Commission to be positive, based on the planned international flights data.

Also, the Commission forecasts a GDP growth of 4.1 per cent in 2022, with the report adding that “this will be mainly on the back of domestic demand, in particular investment boosted by the Recovery and Resilience Plan, and a small positive contribution from net exports”. Growth is is projected to ease to 3.5 per cent in 2023.

The report also points out that high energy prices are driving inflation up, since HICP inflation increased to 4.6 per cent in the last quarter of 2021 pushing the inflation for the whole of the year to 2.3 per cent in 2021 compared to -1.1 per cent in 2020. Inflation is set to further increase to 2.6 per cent in 2022, before moderating to 1.2 per cent in 2023 according to the forecast.