Economy to slow in 2023

The economy will slow down in 2023 as interest rate hikes in tandem with high prices suppress consumer demand, the University of Cyprus’ Economics Research Centre has forecast.

In its latest ‘Economic Outlook’ bulletin, the think tank said that this year “growth is forecast to decelerate. The upward pressures on energy prices and high inflation, as well as monetary policy tightening are expected to affect domestic activity both directly and indirectly through weaker global economic activity. Real GDP growth is projected at 5.6 per cent and 2.6 per cent for 2022 and 2023, respectively.”

Compared to their projection back in October 2022, growth forecasts for 2022 and 2023 have been revised up by 0.7 and 0.2 percentage points, respectively.

“The upward revisions resulted mainly from the higher-than-projected growth rate in the third quarter of 2022 and upward revisions in GDP growth data for recent quarters. In 2024, real GDP growth is forecast at 2.8 per cent.”

The research centre noted that the growth outlook “is accompanied by risks, predominantly on the downside. Downside risks to the outlook for Cyprus could arise if the slowdown in trading partner economies turns out to be more severe than expected. Strong upward pressures on international commodity prices (especially energy prices), as a result of geopolitical tensions, particularly Russia’s war in Ukraine, could sustain inflationary pressures and squeeze real incomes further, weighing on growth prospects.”

Other downside risks could stem from “faster and/or steeper than expected increases in the borrowing costs faced by the government and the private sector, as a result of monetary policy tightening in the euro area, particularly if high inflation persists. The rising borrowing and debt service costs could increase credit risk in conditions of a global slowdown, and may pose challenges to public finances and the domestic banking system, particularly as the complete implementation of the foreclosure framework has been undermined by delays.”

On inflation, the research centre forecast a drop from 8.4 per cent in 2022 to 3.2 per cent in 2023. In 2024, inflation is projected to fall to 2.0 per cent.

The full report can be read here: https://ucyweb.ucy.ac.cy/erc/documents/EconomicOutlook_Jan23.pdf