EC: Mod­est re­cov­ery in 2015

Financial Mirror (Cyprus) - - FRONT PAGE -

The re­ces­sion in Cyprus has been milder than an­tic­i­pated this year and a mod­est eco­nomic re­cov­ery is ex­pected to be­gin in 2015 and strengthen in 2016 in line with the rest of the EU, the Euro­pean Com­mis­sion’s au­tumn fore­cast said on Tues­day.

Pre­sent­ing the pro­jec­tions for Cyprus, Jyrki Kataine, Vice-Pres­i­dent in charge of Jobs, Growth, In­vest­ment and Com­pet­i­tive­ness and Pierre Moscovici, Com­mis­sioner for Eco­nomic and Fi­nan­cial Af­fairs, Tax­a­tion and Cus­toms said that Cyprus’ pub­lic fi­nances are fore­cast to im­prove sig­nif­i­cantly, as a re­sult of the gov­ern­ment’s ef­forts and the im­prove­ment in the econ­omy. Re­flect­ing weak do­mes­tic cost pres­sure, in­fla­tion will be close to zero in 2014, but should in­crease grad­u­ally, they said.

Gov­ern­ment spokesman Nikos Christodoulides said the gov­ern­ment was sat­is­fied with the EC pre­dic­tions for the next year and re­it­er­ated the ad­min­is­tra­tion’s de­ter­mi­na­tion to con­tinue with the strict im­ple­men­ta­tion of the pro­gramme of re­forms for the com­plete restora­tion of the Cypriot.

“The re­ces­sion has com­pleted its cy­cle, un­em­ploy­ment is on a de­clin­ing course after sev­eral years, the pub­lic fi­nances are un­der con­trol and we can now look to the fu­ture with op­ti­mism,” Christodoulides said.

“This is also demon­strated by the rel­e­vant pre­dic­tions of the Com­mis­sion which re­fer to the pos­i­tive rates of growth of the Cypriot econ­omy for the next year,” he added.

RE­CES­SION MILDER

Ac­cord­ing to the EC au­tumn fore­cast, eco­nomic ac­tiv­ity in Cyprus con­tin­ued to de­cline in the first half of 2014, fall­ing by 3.0% com­pared to the first half of last year. Although sig­nif­i­cant, the con­trac­tion has proved milder than an­tic­i­pated in the Spring fore­cast. How­ever, in­creas­ingly high un­em­ploy­ment, wage cuts, and tight credit con­di­tions con­tin­ued to weigh on do­mes­tic de­mand. Im­port con­trac­tion de­cel­er­ated in the first half and net trade con­trib­uted neg­a­tively to growth, the re­port said.

After a sharp de­cline at the be­gin­ning this year due to sub­dued do­mes­tic cost pres­sures and fall­ing wages, HICP in­fla­tion re­turned to pos­i­tive ter­ri­tory in the sec­ond half, mainly due to in­creas­ing prices of goods and ser­vices con­sumed by tourists. The labour mar­ket is show­ing signs of sta­bil­i­sa­tion. Un­em­ploy­ment dropped be­low 16% in the first half of 2014, although this is partly be­cause of a con­trac­tion of the labour force.

CON­TRAC­TION TO MOD­ER­ATE

The EC fore­cast said that mod­est im­prove­ment in business and con­sumer con­fi­dence in­di­ca­tors and most avail­able hard in­di­ca­tors, such as tourist ar­rivals and re­tail sales, sug­gest that the con­trac­tion in the sec­ond half of 2014 will be smaller than in the first part of the year. While do­mes­tic de­mand is ex­pected to de­cline fur­ther, a pos­i­tive con­tri­bu­tion to growth is ex­pected from net trade. As a re­sult, real GDP is fore­cast to con­tract by 2.8% for 2014 as a whole, sub­stan­tially less than pre­vi­ously an­tic­i­pated.

Un­em­ploy­ment is ex­pected to av­er­age 16.2% for 2014 as a whole, fol­low­ing a fur­ther in­crease in the sec­ond half. Mod­er­ate in­fla­tion in the sec­ond half should also off­set the sharp de­cline in the first half, leav­ing HICP in­fla­tion close to zero for 2014 as a whole.

MOD­EST RE­COV­ERY IN 2015

In 2015 and 2016, the econ­omy is ex­pected to grad­u­ally re­gain mo­men­tum, mainly driven by net ex­port. Pri­vate con­sump­tion will re­main sub­dued, re­flect­ing weak wage growth and delever­ag­ing from in­debted bor­row­ers. While the restora­tion of a sound and well­cap­i­talised bank­ing sec­tor should grad­u­ally re­move im­ped­i­ments to growth and al­low for a grad­ual eas­ing of the tight credit con­di­tions, re­cov­ery is ini­tially ex­pected to re­main largely credit-less and led by less lever­aged sec­tors such as pro­fes­sional business ser­vices, and sec­tors with more solid turnover, such as tourism. Sup­ported by im­proved com­pet­i­tive­ness and a grad­ual in­crease in global de­mand, ex­port growth is ex­pected to be rel­a­tively strong and to be­come the main driver of growth in 20152016. In line with the ex­pected re­cov­ery, un­em­ploy­ment should grad­u­ally de­cline, while HICP in­fla­tion is fore­cast to in­crease mod­estly.

RUS­SIA FAC­TOR A RISK

Risks are tilted to the down­side, the EC au­tumn fore­cast said. On the do­mes­tic front, a more pro­tracted pe­riod of tight credit con­di­tions, as well as a deeper and more pro­longed pe­riod of delever­ag­ing, could weigh on do­mes­tic de­mand.

On the ex­ter­nal front, sanc­tions against Rus­sia could hurt growth to a larger ex­tent than ex­pected, both through the de­pre­ci­a­tion of the Rus­sian rou­ble and through pos­si­ble dis­rup­tions in the flow of tourists.

TAX COL­LEC­TION TO IM­PROVE

In 2014, the gen­eral gov­ern­ment head­line and pri­mary bal­ance are pro­jected to im­prove sharply by about 2% of GDP, de­spite the on­go­ing re­ces­sion.

Rev­enue is ex­pected to in­crease com­pared to 2013, driven by con­sol­i­da­tion mea­sures par­tic­u­larly on so­cial con­tri­bu­tions and taxes on pro­duc­tion and im­ports, high div­i­dends from the Cen­tral Bank of Cyprus and im­proved tax col­lec­tion.

To­gether, th­ese fac­tors should more than off­set the neg­a­tive im­pact of slow­ing eco­nomic ac­tiv­ity on the col­lec­tion of taxes on in­come and wealth.

To­tal ex­pen­di­ture is ex­pected to re­main on a de­creas­ing path, de­spite an ad­verse im­pact due to called gov­ern­ment guar­an­tees.

This largely re­flects tight ex­pen­di­ture con­trol, mea­sures un­der Cyprus’ eco­nomic adjustment pro­gramme to re­duce the pub­lic sec­tor wage bill, and a mod­er­a­tion of early re­tire­ments in the pub­lic sec­tor, which re­duced the cost of lump-sum pen­sion pay­ments.

Cyprus’ debt-to-GDP ra­tio is ex­pected to peak in 2015 at about 115% and to de­cline af­ter­wards, sup­ported by the eco­nomic re­cov­ery and the fis­cal per­for­mance. Com­pared to the pre­vi­ous fore­cast, the debtto-GDP ra­tio is pos­i­tively af­fected by the up­ward re­vi­sion of nom­i­nal GDP by about 10% due to the tran­si­tion to ESA2010 and other sta­tis­ti­cal bench­mark re­vi­sions.

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