Cyprus’ economy is set for a “considerable slowdown” towards the end of the year due to global headwinds and persistent inflationary pressures, the EU said on Friday in its Autumn forecast.

“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,” the report said.

Real GDP is forecast to grow by 5.6 per cent in 2022 and to decelerate to one per cent in 2023, before slightly picking up in 2024 at 1.9 per cent. It forecasted that headline inflation is expected to increase to eight per cent in 2022, up from 2.3 per cent in 2021 – while unemployment is to remain stable at about seven per cent.

It noted, however, that public finances are projected to remain sound, but the headline surplus is set to grow at a slower pace than before.

Real GDP increased by 6.3 per cent in the first half of 2022, compared to the same period of 2021, driven mainly by domestic demand. Buoyant private consumption growth was supported by increased employment and savings accumulated during the pandemic.

Investment increased, as it was supported by the Recovery and Resilience Plan (RRP).

However, construction investment was negatively impacted by the high prices of material and tightening financing conditions.

The tourism sector performed well with arrivals and revenues from tourism reaching almost 80 per cent, and 90 per cent of the pre-pandemic levels, respectively in the first three quarter of the year.

But starting from the last quarter of 2022, growth is expected to significantly decelerate due to the global economic slowdown, rising interest rates and upward price pressures, most notably energy.

Low purchasing power in Cyprus’ trading partners is set to weigh on exports of services, notably tourism.

A further blow will come amid weakening consumer and business confidence in Cyprus and increasing interest rates are negatively affecting private consumption and household investments.

This trend is expected to intensify in 2023.

The unemployment rate is projected to reach 7.2 per cent in 2022 slightly down from 7.5 per cent in 2021. In 2023, the unemployment rate is forecast to remain stable, before declining to 6.9 per cent in 2024.

Headline inflation is expected to increase to eight per cent in 2022, up from 2.3 per cent in 2021. This is mainly due to the exceptionally high oil prices, as Cyprus depends heavily on oil products. The prices of non-energy industrial products and food have also increased because of supply chain disruptions and the secondary impact from higher energy prices.

Overall, inflation is projected to decelerate to 4.2 per cent in 2023 and to 2.5 per cent in 2024.

Government revenues are set to grow strongly in 2022 by 10.2 per cent, supported by high inflation. This is only marginally offset by an increase in public spending of 3.1 per cent.