IMF: Smaller recession in 2014 MOF: Recession not exceeding 3%
The recession in 2014 will be smaller than initially estimated by the International Monetary Fund after the conclusion of the fourth review of the economic adjustment programme, according to data included in the IMF’s latest World Economic Outlook (WEO).
The IMF said that Cyprus GDP will contract this year by 3.2%, while in the revised Memorandum of Agreement the Fund projected a 4.2% contraction.
However, the IMF maintained its forecast for a 0.4% growth in 2015.
Meanwhile, the Ministry of Finance sees recession slowing down to -3%, compared to -3.5/4% in August, with the annual contraction seen at -4.2% this year.
The IMF’s WEO report predicts that the rate of unemployment will stand this year at 16.6% and 16.1% in 2015, from 18.6% and 18.0%, respectively, forecast in the Memorandum.
According to the WEO, in 2014 and 2015 Cyprus will sink into deflation as the Consumer Price Index will record negative rates of 1.1% and 0.8%, respectively.
The IMF has reduced its estimates for the current account deficit for both 2014 and 2015, compared with the previous estimate. The Fund expects that in 2014 the deficit in the current account will fall to 1.1% of GDP, from 1.9% in 2013. For 2015, the IMF predicts further reduction of the deficit to 0.8%. Following the fourth assessment, the IMF expected for this year a small current account deficit of 0.1% and for 2015 a surplus of 0.2%.
The Fund said that “in the euro area a gradual, but weak recovery is projected to take hold, supported by a sharp compression in interest spreads for stressed economies and record-low long-term interest rates in core euro area economies”.
It noted that “growth is still weak in the euro area, with lingering risks of more protracted low growth and low inflation”, adding that the euro area “stagnated in the second quarter of 2014, with investments surprising on the downside in several large economies”.
“The outlook is for a modest recovery and subdued recovery” the IMF said, noting that growth -predicated on continued improvements in lending conditions and resilient external demand- is expected to average about 0.8% in 2014 and 1.3% in 2015.
Inflation will average about 0.5% in 2014 and 0.9% in 2015. The unemployment rate is projected to stand at 11.6% this year and drop to 11.2% in the next year.
EU’s GDP is expected to grow 1.5% in 2014 and 1.9% in the next year.
The Ministry of Finance sees further slowdown of recession to -3%, in its October forecast, compared to -3.5/4% in August, while the fourth annual review of the adjustment programme includes the assumption that the annual contraction of the economy will be -4.2% this year.
“We maintain our view that growth will remain negative, not exceeding 3%, and we assume a rebound in 2015 with a gradual restoration of lending at affordable rates”, according to the October Public Debt Management newsletter.
In the second quarter of 2014, GDP (in seasonally adjusted terms) contracted by -2.5% compared with -3.9% in the first quarter on an annual basis.
Exports of goods decreased by 6.2% in January-July compared to the corresponding period in 2013. In JanuaryAugust, tourist arrivals increased by 5.9% compared to the corresponding period in 2013. Inflation stood at 0.8% in August compared to 0.9% in July and for 2014 so far it stands at -0.3%.
Unemployment, in monthly seasonally adjusted figures, decreased from 16.1% in July 2013 to 14.9% in July 2014 (15% in June). The most affected segment of the population is youth. Particularly worrying is the rapid increase in long-term unemployed, the PDM newsletter said.
Compensation per employee in the first half of 2014 declined by around 5.1% compared to the first half of 2013, contributing to a decline of nominal unit labour costs and improving cost competitiveness further.
The upcoming banking stress tests this month and the resolution of the issue of the foreclosure legislation will be the major drivers for the bond market yields in the coming months. External factors (the Ukrainian and Middle East crises) are expected to have an effect too.
The authorities intend to adapt the road-map in examining the external restrictive measures, aiming towards their gradual relaxation and eventual abolition, while ensuring consistency with financial stability.
According to the Finance Ministry, developments in public finances continue to exceed expectations.
The general government budget balance
(GGBB) was in surplus during the first eight months of 2014, to the order of EUR 126 mln (0.8% of GDP), compared to a deficit of EUR 263 mln (-1.7% of GDP) during the same period last year.
The general government primary balance (GGPB) was in surplus during the first eight months to the order of EUR 457 mln (2.9% of GDP), compared to a surplus of EUR 135 mln (0.8% of GDP) in the same period last year.
Total revenue exhibited a positive rate of growth of about 6.7%, reaching EUR 4,449 mln during the first eight months, compared to EUR 4,170 mln during the same period of the year before.
Total expenditure exhibited a negative rate of growth of about 2.5%, reaching EUR 4,323 mln during the first eight months, compared to EUR 4,433 mln during the same period last year.
In accordance with the macroeconomic scenario agreed during the fifth review, the budget balance is estimated to exhibit an improvement with the deficit falling to 4.7% of GDP in 2014 compared to a deficit of 5.4% the year before.
The General Government Debt at the end of September (preliminary data) stood at EUR 18.4 bln. This indicator has not changed since December 2013, the PDM newsletter said.
Short term yields have continued to drop with three month primary market yields dropping to 3.9% in August (no new issuances took place in September). Long term bond yields exhibited a significant drop in August and early September as the effects of the ECB’s monetary decisions were taken in by the markets but have risen again following the general trend in the European periphery. Yields remain below the 5% mark.
The 6th Programme tranche of EUR 433 mln was not disbursed in September due to non-compliance in introducing legislation on foreclosure as demanded by the Troika of adjustment programme partners.