European Commission projects moderate growth trajectory for Cyprus

The European Commission’s latest report on Cyprus’ economic and financial outlook for Autumn 2023 has outlined a series of projections and assessments, painting a nuanced picture of the country’s post-pandemic recovery trajectory.

The report, released on Thursday, and stemming from the 15th post-programme surveillance mission conducted between September 25 and 29, 2023, indicated that Cyprus’ economic growth, having shown resilience post-COVID-19, is anticipated to slow down in the years ahead.

Real GDP growth is expected to decelerate to 2.2 per cent in 2023 from the robust 5.1 per cent recorded in 2022.

Factors contributing to this deceleration include the impact of the ongoing Russia-Ukraine conflict on external demand for financial and business services, while domestic demand and tourism maintain robust growth.

Despite this slowdown, the report forecasts moderate growth of around 3 per cent for 2024 and 2025, primarily driven by substantial investments in energy, education, health, and tourism, partly supported by the Recovery and Resilience Facility (RRF).

The labour market in Cyprus remains robust, with employment on an upward trajectory, expected to drive unemployment below 6 per cent by 2025.

Inflation is anticipated to significantly decelerate from 8.1 per cent in 2022 to 4.1 per cent in 2023, with a further decline projected in the forthcoming years. However, persistent elevated core inflation, partly due to automatic wage indexation, remains a concern.

While the fiscal position is described as strong, the report highlights potential risks to the fiscal outlook, notably related to energy price surges and contingent risks from the banking sector.

Cypriot banks showcased strong profits in the initial half of 2023, bolstered by higher policy rates.

Despite this, concerns linger regarding borrowers’ capacity to service loans amidst increasing interest rates and living costs, posing moderate risks for the banking sector.

The report emphasised the need for an effective foreclosure framework to manage Non-Performing Loans (NPLs) and maintain payment discipline.

In addition, the report said that the repeated suspensions of this framework have hampered its efficacy, impacting NPL reduction efforts and subsequently affecting the resilience of the banking sector.

However, the report underscores that Cyprus retains the capacity to service its debt, maintaining a sound economic, fiscal, and financial stance overall.

Despite challenges, the country faces low risks in the short and long term, while medium-term risks are rated at a moderate level.

What is more, the report noted that Cyprus’ current account deficit has notably surged and is anticipated to maintain a high standing in the upcoming years.

Projections indicate a rise to 9.6 per cent of GDP in 2023 from the 7.9 per cent recorded in 2022.

Moreover, the report stated that this deterioration primarily stems from a decline in exports of business and professional services, largely attributed to the ongoing conflict between Russia and Ukraine.

Forecasts for 2023 suggest a further decline in the trade of goods due to increased ship registrations in the initial half of the year and robust domestic demand.

Expectations for 2024 hint at a marginal improvement, with the current account projected to reach 8.8 per cent of GDP, mainly driven by a slowdown in exports of non-tourism services. In 2025, a more significant recovery is anticipated, with the deficit shrinking to 7.5 per cent of GDP.

This projection aligns with the anticipated global economic recovery, increased external demand, and an expected decline in energy and commodity prices.