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Outlook more positive for 2023 as inflation, joblessness set to bite this year

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Cyprus should expect higher joblessness and further inflation in 2022, which is also expected to impact the recovering tourism sector, but the economy should improve next year, according to the EU’s Spring Forecast published on Monday.

It said that following a strong rebound of 5.5 per cent in 2021, surpassing the 2019 pre-pandemic level, economic activity is expected to slow down to 2.3 per cent in 2022 due to the negative impact of Russia’s invasion of Ukraine and soaring inflation.

“The outlook is more positive for 2023, as tourism is expected to further recover and global energy prices to somewhat ease,” the forecast said.

It said the tourism sector recovered only partially in 2021 compared to 2019 – a record year – with arrivals reaching only 48.7 per cent of 2019 levels and revenues 56.4 per cent.

“The Cypriot economy started 2022 on a strong footing, but Russia’s invasion of Ukraine and the related sanctions are expected to impact economic activity, especially tourism and services exports, as Russia is an important market for both,” it said.

High fuel prices and rising inflation present an additional challenge for the tourist sector, it added.

Alongside a drop in consumer confidence, high inflation will also impact private consumption and household investment in 2022. Overall, real GDP is forecast to grow by 2.3 per cent in 2022.

At the same time, government consumption is expected to decelerate significantly, as the pandemic support measures are progressively being phased out.

A stronger growth momentum is projected to resume in 2023, with 3.5 per cent GDP growth, as tourism demand is expected to recover significantly and the delayed partial indexation of wages is set to support purchasing power.

The implementation of the Cypriot Resilience and Recovery plan is expected to support investment over the forecast horizon, the forecast said.

“Significant uncertainty and downside risks to the growth outlook remain, as the tourism sector and other export-oriented services sectors are particularly vulnerable to external shocks,” it added.

The unemployment rate remained broadly stable in 2021 at 7.5 per cent. Employment and vacancies were on the rise at the end of 2021, whereas the slowdown of economic activity is set to put brakes on the labour market later this year. In 2022, unemployment is forecast to somewhat increase to 7.8 per cent, before resuming its decreasing trend in 2023 to 7.3 per cent.

Inflation has increased and is expected to reach 5.2 per cent in 2022, up from 2.3 per cent in 2021.

“This is mainly due to exceptionally high oil prices, as Cyprus depends heavily on oil products. The prices of non-energy industrial products and food have also increased as a result of supply chain disruptions and the secondary impact from higher energy prices,” the forecast said, adding that tin 2023, energy prices are expected to somewhat moderate and supply side problems dissipate, with inflation projected at 2.7 per cent.

Government expenditure is also forecast to decrease with the phasing out of pandemic support measures such as health sector support schemes, wage subsidies and liquidity support to businesses. However, government revenues are expected to grow at a lower pace due to the less positive macroeconomic outlook, the report said.

Public debt decreased to 103.6 per cent of GDP in 2021 on the back of high nominal GDP growth and thanks to cash reserves accumulated in the previous year. It is expected to decrease to 93.9 per cent and 88.8 per cent in 2022 and 2023, respectively.

Public finances are set to continue the improvement shown in 2021, with headline balance increasing from -1.7 per cent in 2021 to -0.3 per cent in 2022.

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