Cyprus GDP revised upwards, inflation to more than halve next year

The University of Cyprus’ Economics Research Centre (CypERC) on Monday released its updated economic outlook report, noting that real GDP growth in 2022 is projected at 4.9 per cent, up by 2 percentage points compared to the forecast in the centre’s July issue.

‘upward revision resulted from strong activity growth in the second quarter and robust demand during the third quarter, especially external demand for tourist services,” the centre said in its report.

“However, the negative effects of the ongoing war in Ukraine on economic activity appear to be unfolding more slowly than previously thought, impacting the outlook for 2023,” it added.

The report explains that real GDP growth in 2023 is forecast at 2.4 per cent, down by 0.4 percentage points from the forecast released in July.

The downward revision was primarily attributed to a number of factors, including sustained upward price pressures, the deterioration of economic sentiment in the EU, the weakening of business confidence in the services sector in Cyprus, as well as the uptick of lending interest rates in the euro area.

Furthermore, the report noted that the risks to the growth outlook are currently on the downside, stating that “as monetary and fiscal policies normalise, the adverse effects of the ongoing war in Ukraine on activity may build up”.

Further escalation of Russia’s war in Ukraine could amplify upward pressures on commodity prices, prolong high inflation and deepen the energy crisis in Europe, increasing the cost of living further and negatively affecting growth,” the report added.

What is more, lower-than-projected growth rates in Cyprus may result if the slowdown in both the European Union and the United Kingdom turns out to be more adverse than currently expected.

The centre also explained that the tightening of monetary policy may pose risks to Cyprus’ domestic outlook if the increases in sovereign borrowing costs and debt servicing costs for firms and households are steeper than anticipated.

“In view of the tightening financial conditions, universal (instead of targeted) fiscal measures to counter the effects of high inflation, may undermine the fiscal position and cloud the growth prospects,” the centre said.

“Also, new COVID-19 outbreaks in Cyprus and abroad may hamper economic activity through possible containment measures and renewed supply chain disruptions,” it added.

Finally, consumer price index (CPI) inflation is forecast at 8.6 per cent and 3.4 per cent for 2022 and 2023, respectively.

“The inflation outlook is mainly driven by the recent acceleration of inflation, as a result of strong increases in international prices of energy and food in combination with robust economic activity,” the report said.

“The depreciation of the euro against the US dollar and upward revisions in selling price expectations in services have also influenced the inflation outlook,” the report concluded.