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Cyprus GDP to fall in 2023, recovery expected in subsequent years

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Cyprus’ GDP is estimated to have reached a growth rate of 5.8 per cent for 2022, according to a report released on Friday by the Central Bank of Cyprus (CBC).

However, in a reflection of adverse economic conditions on the international level, Cyprus’ GDP growth rate is expected to fall to 2.5 per cent in 2023, before rising to 3.1 per cent in 2024 and 2025 respectively.

In its December 2022 mid-term forecasts for the main macroeconomic figures in Cyprus for the years 2022-2025, the central bank stated that unemployment in 2022 is expected to register a decrease to 6.7 per cent of the labour force, compared to 7.5 per cent in 2021.

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Inflation, as measured by the Harmonised Index of Consumer Prices (HICP), is forecast to rise significantly in 2022, reaching 8.1 per cent, from 2.3 per cent in 2021.

In addition, structural inflation, meaning inflation excluding energy and food, is expected to rise to 5 per cent in 2022, up from 1.3 per cent in 2021.

According to the report, despite the ongoing effects of the war in Ukraine and subsequent international sanctions imposed on Russia, the Cypriot economy recorded a significant growth of approximately 6 per cent in the first nine months of 2022.

However, the economic consequences of the war are expected to have a stronger impact during the first quarter of 2023.

“The downward revision of the outlook for the external environment, due to the turbulence in the international energy markets, has adversely affected the consumer and business climate, resulting in euro area economies now being expected to enter a mild and short-lived recession, lasting between the end of 2022 until the first quarter of 2023, which will also have an impact on the domestic market,” the report explained.

“The increased energy prices are expected to reduce the purchasing power of household incomes which, in combination with the increase in interest rates, will result in a negative impact on domestic demand in 2023,” it added.

Moreover, the report said that despite the continued reduction in supply chain disruptions affecting raw materials and goods, these will carry on affecting economic activity and contribute to the rise in prices, with the gradual correction of the aforementioned disturbances expected around the middle of next year, according to the relevant Eurosystem work assumptions.

The central bank also noted that the growth rate of economic activity for 2022 is expected to reach 5.8 per cent, following a significant growth of 6.6 per cent in the previous year, with GDP growth being primarily driven by domestic demand, including investments and private consumption, but also the faster than expected recovery of the tourism industry.

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The projected resilience in domestic demand, the report continued, comes from ongoing investments, the reopening of the economy after the worst phase of the pandemic had passed, the continued inflow of foreign companies, particularly in the technology sector, as well as, in part, support from private consumption as a result of the utilisation of their savings.

Additionally, the upward revision of 0.3 percentage points in 2022 compared to the September 2022 forecasts is mainly due to the continued positive course of economic activities. These are primarily related to tourism and other services, including those in the technology sector, while a slowdown in GDP is expected, with the rate for 2023 projected at 2.5 per cent, before an increase of 3.1 per cent in each of the subsequent two years.

The central bank also reported that “no particular revision has been recorded in relation to the September 2022 forecasts, something which it attributed to the already adopted downward revision of the outlook in the external environment, given the negative effects of the protracted Russian-Ukrainian war and the energy crisis in Europe”.

“The continued influx of foreign companies who choose to operate or expand their activities in Cyprus, through the relocation of their international headquarters, partly compensates for the originally expected medium-term effects, referred to as scarring effects, mainly in terms of the turnover in the professional services sector due to the war in Ukraine,” the report added.

Regarding the individual indicators, the central bank stated that unemployment in 2022 is expected to register a decrease to 6.7 per cent of the labour force, compared to 7.5 per cent in 2021.

Based on the available data, this is due to the larger-than-expected tightness in the labour market and the expected manageable impact from the war, as shown by the European Commission’s recent monthly surveys of employment expectations over the next three months.

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The report added that in the following years, there is an expectation for a downward trend in unemployment, with the unemployment rate reaching 6.5 per cent in 2023, 5.9 per cent in 2024 and approaching full employment conditions with a rate of 5.5 per cent in 2025.

In addition, the negligible revision in terms of the September 2022 forecasts, is due to the resilience of the labour market for the current year, as captured by available data and the fact that the GDP forecast for 2023 and beyond has not been substantially revised.

Inflation, as measured by the Harmonised Index of Consumer Prices (HICP), is forecast to increase significantly in 2022, rising to 8.1 per cent, from 2.3 per cent in 2021, with the downward revision of 0.3 percentage points relative to the September 2022 forecast being primarily driven by lower-than-expected energy prices and relatively smaller-than-forecast price pressures for some services, partially offset by higher-than-expected food prices.

“As in previous forecasts, a gradual normalisation of inflationary pressures is expected to take place between 2023 and 2025, with inflation reaching 3.3 per cent, 1.7 per cent and 1.8 per cent respectively,” the central bank said.

These rates are attributed to a number of factors, including ongoing supply chain disruptions, despite their smaller impact than in previous years, tightness in the labour market, as well sa the slowdown in the HICP in the coming years, which reflects the stability of longer-term inflation expectations.

Furthermore, the downward revision in the inflation rate for the years 2023 and 2024 is mainly due to the lower than originally forecast energy prices, in accordance with the revised forecasts for the course of oil prices.

In terms of structural inflation, meaning inflation excluding energy and food, the report said that this is expected to rise to 5 per cent in 2022, compared to 1.3 per cent in 2021.

Between 2023 and 2025, structural inflation is expected to fall to 2.9 per cent, 2.2 per cent and 2.1 per cent respectively, mainly due to an expectation that supply chain disruptions will be largely resolved, primarily due to the impact on demand resulting from recent interest rate hikes.

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