EY: Worst is over, ma­jor risks re­main

Financial Mirror (Cyprus) - - FRONT PAGE -

The near-term out­look for Cyprus re­mains grim as a re­sult of last year’s near-melt­down of the fi­nan­cial sec­tor and an ag­gres­sive aus­ter­ity pro­gramme, but GDP is ex­pected to con­tract by 4.3% this year, and for growth to re­sume only in 2016, ac­cord­ing to the Sum­mer 2014 EY Eu­ro­zone Fore­cast (EEF).

The sur­vey said that the re­cov­ery in Cyprus is likely to be mod­est, given the con­sid­er­able debt bur­den fac­ing the pri­vate sec­tor and the hang­over from a se­vere credit crunch.

More­over, Cyprus still faces con­sid­er­able head­winds: house­hold spend­ing re­mains con­strained by high un­em­ploy­ment, fis­cal con­sol­i­da­tion, de­clin­ing wages and low (al­beit im­prov­ing) con­sumer con­fi­dence.

“We ex­pect con­sumer spend­ing to con­tract by 4.8% this year, be­fore even­tu­ally re­turn­ing to growth in 2016,” said the EY re­port.

Solid progress has also been made on clean­ing up the fi­nan­cial sec­tor, the re­port added, ex­plain­ing that “de­posits have sta­bilised and the im­prov­ing eco­nomic out­look en­cour­aged the govern­ment to ease cap­i­tal con­trols fur­ther and the Bank of Cyprus to re­lease some of the EUR 933 mln of de­posits frozen un­der the bailout last year. But chal­lenges re­main with the pri­vate sec­tor, which is still highly lever­aged and has non-per­form­ing loans weigh­ing on bank bal­ance sheets.” The EY re­port said that “the out­look for cap­i­tal spend­ing re­mains poor. In­vest­ment must con­tend with enor­mous pres­sure from fis­cal con­sol­i­da­tion, an im­paired fi­nan­cial sec­tor and poor busi­ness con­fi­dence. We ex­pect in­vest­ment to fall by around 8% this year, be­cause of cuts to pub­lic cap­i­tal ex­pen­di­ture and re­stricted ac­cess to credit.”

“De­spite good progress on the pol­icy front, the out­look re­mains un­cer­tain and the risks high. Head­line con­sumer price in­fla­tion has been fall­ing since Oc­to­ber 2013, un­der­scor­ing the risk of a pe­riod of sus­tained de­fla­tion that would threaten the re­cov­ery.

“Al­though our base­line fore­cast is that Cyprus will avoid fall­ing into a de­fla­tion­ary spi­ral, struc­tural and tran­si­tory fac­tors — in­clud­ing de­pressed de­mand, fis­cal aus­ter­ity, a strong euro and fall­ing en­ergy prices — present clear downside risks to our in­fla­tion projections. If de­fla­tion were to be­come en­trenched, growth would be hit, par­tic­u­larly given the high lev­els of debt in the pub­lic and pri­vate sec­tors,” the EY re­port con­cluded. im­prove com­pet­i­tive­ness are reap­ing the re­wards, but oth­ers are con­tin­u­ing to lag,” said Tom Rogers, Se­nior Eco­nomic Ad­viser to the EY Eu­ro­zone Fore­cast.

“And we re­main con­cerned about the weak­ness of price growth and the risk that in­ter­nal or ex­ter­nal shocks might push the Eu­ro­zone to­ward a dam­ag­ing de­fla­tion­ary spell. Re­cent moves by the ECB demon­strate it has the ca­pac­ity to act, and we are en­cour­aged by its in­ten­tion to fo­cus any quan­ti­ta­tive eas­ing pro­gram di­rectly on the debt of non-fi­nan­cial firms.”

“We shouldn’t for­get that the Eu­ro­zone is in a far stronger po­si­tion than it was even 12 months ago, but eco­nomic re­cov­ery re­mains a muted af­fair. As on many other oc­ca­sions through­out the last six years, it is still a case of two steps for­ward and one step back. Progress yes, but many chal­lenges still ex­ist,” added Mark Otty, EY Area Man­ag­ing Part­ner for Europe, Mid­dle East, In­dia and Africa.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.