The Central Bank of Cyprus (CBC) on Friday slightly revised its forecast for the country’s economic growth in 2024, estimating it to be at a rate of 2.8 per cent.
This adjustment, the CBC explained, marks a marginal increase from its December projection of 2.6 per cent.
According to the macroeconomic forecasts released in March 2024, the CBC has maintained its predictions for 2025 and 2026 at 3.1 per cent and 3.2 per cent respectively. Additionally, the labour market appears resilient to external challenges.
Based on the new estimates, the Harmonised Index of Consumer Prices (HICP) is expected to fluctuate at around 2 per cent for the period 2024-2025, compared to the previous forecast of 2.4 per cent for this year, indicating a weakening of external inflationary pressures.
The upward revision in the GDP growth rate, as stated by the CBC, is attributed to the upward revision of domestic demand prospects. This adjustment compensated for slightly less favourable assumptions regarding both tourism and exports of professional and financial services due to the fragile external environment.
The CBC noted that the medium-term trajectory of GDP is primarily driven by expected increases in both domestic and external demand.
“The recovery of households’ real disposable income, as a result of the expected further decline in inflation, wage increases, and the resilience of the labour market, is expected to support domestic demand,” the CBC reported.
It highlights that during the years 2024-2026, the expected GDP growth is mainly based on the trajectory of domestic demand.
Significant contributions are expected primarily from large ongoing private investments, as well as projects to support digital and green development and other reform projects under the Recovery and Resilience Plan.
The CBC further indicates that, based on the financial results of the fourth quarter of 2023 and the latest available data, there appears to be no significant negative impact on investments due to the conflict in the Middle East, through reduced demand or possible delays in the implementation of private investments by Israeli interests.
“Private consumption, although expected to slow down, is expected to remain a significant driver of economic growth in the coming years, reflecting the resilience of the labour market and the expected recovery of real disposable income,” the CBC estimates.
It notes that in 2024, net exports will negatively contribute to the economic growth rate due to the limited impacts of the ongoing Russo-Ukrainian war on the business cycle of professional services and the expected loss of Israeli tourists.
“The aforementioned dampening effects are expected to weaken in the medium term, supporting growth, within the framework of market diversification for the provision of tourism and professional services,” the CBC stated, adding that continued support for GDP is also expected from the expansion of the business cycle of foreign technology companies that have settled in Cyprus in recent years.
Resilient labour market
According to the CBC, the labour market continues to support the Cypriot economy, with unemployment expected to decrease to 5.8 per cent of the workforce in 2024 compared to 6.1 per cent in 2023.
Compared to the December 2023 forecasts, a lower unemployment rate is expected in 2024 by 0.2 percentage points, primarily due to the ongoing resilience observed in the labour market and more positive results regarding the unemployment rate for 2023 compared to previous forecasts.
“Despite the impact of the ongoing war in Ukraine, the unemployment rate recorded in the fourth quarter of 2023 was lower than expected, at 5.9 per cent,” it states, adding that, in correlation with the expected GDP growth, unemployment is expected to further decrease to 5.6 per cent in 2025 and 5.3 per cent in 2026, approaching conditions of full employment.
Improvement in Harmonised CPI
Based on the CBC’s estimates, inflation (Harmonised Index of Consumer Prices, HICP) is expected to further decline compared to 2023 and fluctuate at 2.0 per cent during the period 2024-2025 and 1.9 per cent in 2026.
“The further decline in HICP is expected due to the predicted continuous weakening of inflationary pressures generated in previous years by mainly external supply factors, as well as the impact of the unified monetary policy which continues to have a dampening effect,” it states.
Additionally, downward revisions in energy prices and the expected normalisation of both profit margins for businesses and wage increases are also expected to contribute to the slowdown in HICP during the period 2024-2026.
Compared to the December 2023 forecasts, the downward revision of HICP by 0.4 percentage points for 2024 is mainly attributed to the downward revisions in energy prices and, to a lesser extent, industrial products excluding energy.
Core inflation, meaning inflation excluding energy and food, is also expected to further decrease compared to 2023 and fluctuate at 2.6 per cent, 2.3 per cent, and 2.2 per cent in 2024, 2025, and 2026, respectively, without any significant revision.
The declining trend in core inflation is mainly expected due to the continued dampening impact of the unified monetary policy of the eurozone (with a time lag and in the medium-term horizon) on demand for services and goods.
Probability of Deviation
According to the CBC, the probabilities of deviation from the base scenario of forecasts tend to be slightly downward for GDP during the period 2024-2026 and are mainly related to the negative economic impact of ongoing geopolitical tensions and the fragile trajectory of external demand.
Moreover, stricter-than-expected financing conditions may adversely affect domestic demand.
Simultaneously, upward risks of deviation from the base scenario of forecasts are associated with higher than predicted private consumption if household savings rates do not increase to the extent expected over the projection horizon compared to the base scenario of forecasts.
On the contrary, risks concerning inflation are balanced for the years 2024-2026 in terms of deviation from the base scenario of forecasts.
Upward risks mainly stem from possible higher-than-expected energy prices, as well as impacts related to climate change (implementation of relevant tax policies, extreme weather phenomena).
Upward risks are also associated with the realisation of potential secondary effects, such as larger (than expected) wage increases and more resilient profit margins for companies, as well as higher-than-expected private consumption.
On the other hand, the CBC concludes, there is a possibility that inflation may be lower than the estimate of the base scenario, due to a greater-than-expected reduction in domestic demand and overall economic activity, in case the impact of the ECB’s monetary policy proves to be stronger than expected, as well as due to increased geopolitical tensions.
