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European Commission's Spring forecast predicts continued growth-drop of inflation for Cyprus

Cyprus is expected to have continued economic growth, as well a continued drop for inflation, both in 2024 and in 2025, according to the latest economic forecast included in the Spring 2024 Economic Forecast published by the European Commission.

The Commission forecast predicts robust growth for economic activity in Cyprus in 2024 on the back of persistently strong domestic demand and improving exports.

Inflation meanwhile, is continuing its downward trend towards the 2% target as energy and food prices moderate while the labour market remains resilient.

The government budget is set to remain in surplus with public debt decreasing at a fast pace according to the forecast.

The European Commission's Spring Forecast projects GDP growth for Cyprus at 2.8% in 2024 and at 2.9% in 2025. Employment is expected to continue increasing at a steady pace of 1.4% annually.

Inflation is expected to fall from 3.9% in 2023 to 2.4% in 2024 and to 2.1% in 2025. The budget is expected to remain in a surplus of 2.9% of GDP in 2024.

At the EU level the Spring Forecast, which was presented by Commissioner for the economy, Paolo Gentiloni, predicts that following broad economic stagnation in 2023, better-than-expected growth at the start of 2024 and the ongoing reduction in inflation set the scene for a gradual expansion of activity over the forecast horizon.

The European Commission's Spring Forecast projects GDP growth in 2024 at 1.0% in the EU and 0.8% in the euro area. In 2025, GDP is forecast to accelerate to 1.6% in the EU and to 1.4% in the euro area. EU HICP inflation is expected to fall from 6.4% in 2023 to 2.7% in 2024 and 2.2% in 2025. In the euro area, it is projected to decelerate from 5.4% in 2023 to 2.5% in 2024 and to 2.1% in 2025

The forecast for Cyprus

Strengthening of economic growth: Real GDP growth moderated to 2.5% in 2023. It was driven by domestic demand, in particular consumption, on the back of increasing employment and disposable incomes in an environment of decreasing inflation. Net exports had a big negative impact (-6 pps.) on growth, mainly because exports of financial and professional services dropped significantly due to geopolitical tensions, while imports rose sharply on account of increased consumption and investment. A large increase in ship registration also affected last year's figures.

Economic growth is projected to strengthen to 2.8% in 2024 and to 2.9% in 2025. Domestic demand is set to continue driving growth, fuelled by the anticipated surge in investment from both existing and upcoming major construction projects. This investment boost will complement the already positive contributions from household and government consumption. Public investment which has already picked up significantly since 2023 is expected to continue growing strongly partly financed by RRF and other EU funds. Exports of tourism and non-tourism services are set to perform well. Imports are also increasing, driven by both investment and consumption needs and by the large import component of most of the exports. However, the combined contribution of net exports to growth is expected to be just below zero in 2024 and 0.3 pps. in 2025.

The current account deficit increased to its historic high of 12.1% of GDP in 2023 and is expected to decline but remain elevated at 11.2% of GDP in 2024 and 10.8% in 2025. Cyprus’s reliance on energy imports, alongside imports of consumption and investment goods, contributed to the widening of the trade deficit in an environment of high energy prices. Moreover, the repatriation of profits by foreign-owned companies, including banks, is impacting primary income outflows, further widening the current account deficit.

Increasing employment: In 2023, employment increased by 1.4% and the unemployment rate decreased to 6.1%, down from 6.8% in 2022. Employment is set to continue increasing at a relatively stable pace of around 1.4% annually over the forecast horizon. Unemployment is forecast to remain on its downward trajectory reaching 5.6% in 2024 and 5.4% in 2025. The reinforcement of the labour force by foreign workers is expected to continue as domestic labour shortages persist.

Inflation on a downward path: HICP inflation is expected to decrease from 3.9% in 2023 to 2.4% in 2024 and continue decelerating to 2.1% in 2025. The decrease is set to be driven mainly by the fall in energy and food prices. Domestic price pressures (particularly services inflation) remain elevated in part owing to continued wage growth.

Sustained budgetary surpluses: The general government surplus increased further to 3.1% of GDP in 2023 (from 2.7% in 2022). Double-digit revenue growth from tax-rich drivers like consumption and rising wages, outpaced robust expenditure growth fuelled by increased public wages and social spending. However, measures to mitigate the impact of high energy prices slightly dampened the budget balance, with a net budgetary cost of about 0.4% of GDP in 2023.  

In 2024, the budget is expected to remain in a surplus of 2.9% of GDP. Public wage expenditure is projected to grow by almost 8% mainly on account of inflation indexation. Public capital spending is also temporarily affected by the mortgage-to-rent scheme for vulnerable households managed by the state-owned asset management company (KEDIPES). A positive driver of the 2024 budget surplus is the planned complete phasing-out of the remaining energy-related measures by the summer. The revenue from social security contributions is also projected to continue increasing strongly as the rates of employers and employees’ contributions were raised as of January 2024.  

The budget surplus is forecast to remain at 2.9% of GDP in 2025 based on unchanged policies, mainly thanks to the carry-over effect of the phasing out of measures to mitigate the impact of high energy prices.

The general government debt-to-GDP ratio is expected to drop significantly over the forecast horizon from 77.3% in 2023 to 65.4% in 2025 mainly thanks to primary surpluses combined with continued strong nominal GDP growth.

(Source: CNA)

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