Growth at 2.7 per cent, inflation at 7 per cent for 2022

The growth rate for 2022 is expected to be 2.7 per cent, while inflation will rise to 7 per cent, according to the revised June forecasts, published by the Cyprus Central Bank on Friday.

According to the report accompanying the forecasts, the recovery of the Cypriot economy “has been largely negatively affected, at least in the short term, by the effects of the Russian invasion of Ukraine.”

“Uncertainty about the economic outlook is high, with the extent of the aforementioned effects depending on the duration of the war and the sanctions on both sides. With regard to supply chain disruptions, it is estimated that these will have a longer duration than expected in relation to the CBC forecasts for December 2021, with an expected full normalization at the end of 2023,” the Central Bank says.

The economic growth rate for 2022 is expected to slow down to 2.7 per cent, compared to a growth rate of 5.5 per cent in 2021, with the biggest impact being recorded on net exports, the CBC notes.

The downward revision by 0.9 percentage points in 2022 compared to the December 2021 forecast is mainly due to the impact of geopolitical developments in the sectors of trade, transport, hotels and restaurants, as well as professional services, according to the CBC.

In 2023 and 2024, GDP is expected to recover to 3.6 per cent and 3.7 per cent, respectively, although some scarring effects on the turnover of the professional and financial services sectors can not be ruled out, the report adds.

In terms of unemployment, in 2022 it is expected to record a drop to 6.9 per cent of the workforce, compared to 7.5 per cent in 2021, with a slight upward revision by 0.1 percentage points, compared to the forecasts of December 2021.

Unemployment is expected to reach 6.3 per cent in 2023 and converge to full-time employment in 2024, reaching 5.7 per cent, “due to the ongoing economic recovery, as well as the continued effort of the Public Employment Services to place unemployed people in job vacancies,” CBC notes.

A wage-price spiral mechanism, due to the correction in the labour market as well as the integration of higher wage increases, due to new collective agreements and the system of automatic indexation (where applicable), is not expected, it says.

On the other hand, inflation (Harmonized Index of Consumer Prices, HICP) is projected to increase significantly in 2022 to 7 per cent from 2.3 per cent in 2021. The upward revision compared to the forecast of 2.5 per cent in December 2021 amounts to 4.5 percentage points, mainly due to increases in energy prices, as well as the expansion of inflationary pressures in the categories of services, food and industrial products, excluding energy.

Gradual smoothing of inflationary pressures is forecast for the years 2023-2024, at 2.8 per cent and 1.9 per cent, respectively. The reduction of the HICP in 2024 below 2 per cent is due to the expected gradual correction in oil and food prices, according to the common working assumptions of the Eurosystem, says the CBC.

Structural inflation, referring to inflation excluding energy and food, is expected to rise to 4.1 per cent in 2022, compared to 1.3 per cent in 2021. In the years 2023 and 2024, it is projected to record a correction and rise to 2.5 per cent and 2.2 per cent, respectively. This is due to the expected, albeit slow, normalization of supply chain congestion problems.

It is noted that a more detailed analysis of the forecasts for all major macroeconomic figures is included in the Financial Bulletin of the CBC – June 2022, which will be published in the coming days.