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CBC governor addresses London Business School alumni

the london business school
The London Business School

Central Bank of Cyprus (CBC) governor Constantinos Herodotou on Tuesday delivered a speech at an event organised by the London Business School Alumni Cyprus Club, touching on a number of issues, including the current economic challenges faced by both Cyprus and the euro area.

Regarding the euro area, Herodotou noted that the war in Ukraine disrupted the expected economic recovery, both in terms of households and businesses, that would have resulted from post-pandemic spending by European governments.

herodotou central bank
Cyprus Central Bank governor Constantinos Herodotou

“As a result, GDP is growing at a much slower pace this year than previously expected, with growth hampered by soaring energy and commodity costs, low confidence and supply chain disruptions,” Herodotou said, noting that inflation is approaching double digits while energy shortages during the winter cannot be excluded as a possibility.

“Nevertheless, a recovering tourism industry, decreasing unemployment, and EU funding payments all help to boost activity and limit, to some extent, output loss,” he added.

In terms of growth in the Euro area, the GDP growth rate reached 0.8 per cent during the second quarter of the year, a negligible improvement over the growth rate of 0.7 per cent in the preceding quarter.

“Even though these growth rates are below the rates expected before the start of the war, the 0.8 per cent, growth is still the strongest performance in three quarters, prompted by the easing of Covid restrictions and the good summer tourism season in southern countries,” Herodotou explained.

“The impact of war developments is expected to be shown in the data of the fourth quarter of 2022 and the first half of 2023,” he added, noting that “this outlook is reflected in the latest ECB projections for economic growth, which have been revised down markedly for the remainder of the current year and throughout 2023”.

On inflation, which reached 9.1 per cent in August 2022, Herodotou said that energy inflation, which reached 38.2 per cent, was the primary driver of inflation overall. According to a number of market-derived indicators, oil prices are expected to cool down, while gas prices will continue to stay at extremely elevated prices.

“The relatively high import share of gas needed for the EU27 energy consumption will create extensive challenges in the winter months of 2023, especially in countries with gas-intensive industrial sectors,” the CBC governor said.

Regarding supply-side bottlenecks, Herodotou said that while these have been easing, “they continue to gradually feed through to consumer prices and are putting upward pressure on inflation, as is recovering demand in the services sector”. The governor noted that the euro’s depreciation has also been a factor in rising inflationary pressures.

In terms of the Cypriot economy, Herodotou noted that real GDP growth reached 6 per cent during the first half of 2022, despite the detrimental effects of the war in Ukraine, primarily due to the strong performance of the tourist sector, and further supplemented by information, communication and professional services. However, any weaknesses are expected to become more clearly pronounced in the second half of 2022, as well as during 2023.

“Our exposure to Russia via the export of services side is the most significant vulnerability, with the most important exposure relating to financial and other business services and, to a lesser extent, tourism, transport as well as telecommunications, computer and information services,” Herodotou said.

“At the same time, it is important to mention significant adaptation effects, for example in the area of tourism, where losses from the Russian market have been covered to a large extent by other markets such as the UK, Poland, Germany, Israel and Scandinavian countries,” he added.

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