Cyprus economy did well in Q1 but risks remain says European Commission

The European Commission on Thursday said that the Cypriot economy exceeded expectations during the first quarter of 2022, with a number of sectors outpacing performance forecasts.

“The Cypriot economy surprised on the upside in the first quarter of 2022, mainly as a result of the faster-than-expected recovery of tourism and the continuing expansion of exports of other services, notably business services and IT,” the commission said in its latest economic forecast report.

The report added that tourist arrivals and revenues rose considerably in the opening months of 2022, reaching approximately 75 per cent of their pre-pandemic levels.

Moreover, the tourism sector’s prospects continue to be positive for the summer season, despite the substantial loss of Russian tourists, a market that Cyprus had previously relied on heavily in the past.

This expectation is based on data on planned international flights, as well as surveys on reservations for hotels and other forms of tourist accommodation.

However, the commission warned that dented consumer confidence, in conjunction with rising inflation and higher interest rates will deal a blow to the economy in the second half of the year.

This will lead to a slowing down of both households’ consumption and investments from businesses during this time.

The commission projects Cyprus’ GDP to grow by 3.2 per cent year-on-year at the end of 2022, while the projection for 2023 is a GDP growth rate of 2.1 per cent.

In addition, Inflation will hit 7 per cent in 2022 before falling to a more manageable 3.3 per cent in 2023.

The commission said that domestic demand will be the main driver of growth, with additional growth coming from the net exports of services.

Investment is expected to fall, especially in sectors like construction. This has been primarily attributed to the gradual tightening of financial conditions, ongoing supply chain disruptions that are expected to remain unabated, as well as the extremely high prices for construction materials. The rise in construction material costs has already impacted the sector in Cyprus something which has resulted in reduced activity when compared to previous years.

However, the commission noted that “on the positive side, the implementation of the Cypriot Recovery and Resilience Plan is expected to support investment”.

The report added that “private consumption is projected to be adversely affected by high inflation and the erosion in purchasing power, even though households’ income is supported by measures adopted by the government to address high energy prices and the partial indexation of wages to be applied in January 2023”.

What is more, the negative global impact of the war in Ukraine, as well as the resulting sanctions imposed on Russia, continues to be a source of uncertainty and downside risks to Cyprus’ growth outlook.

This is also the case with the coronavirus pandemic and how it evolves over the coming months.

The commission explained that tourism and export-reliant services sectors are particularly vulnerable to these risks.

“High energy prices are driving up inflation, with HICP headline inflation being forecast to average 7 per cent this year and to decelerate to 3.3 per cent in 2023, in line with the assumption that price pressures from tight commodity markets will ease next year,” the report noted.

“The projection for next year takes into account the impact of the partial automatic indexation of wages,” the commission concluded.