Re­ces­sion to be ‘milder’ in 2015, says UCy

Financial Mirror (Cyprus) - - FRONT PAGE -

Eco­nomic re­ces­sion is ex­pected to be milder in 2015, ac­cord­ing to the Univer­sity of Cyprus Eco­nomics Re­search Cen­tre’s monthly out­look for Jan­uary that refers to the neg­a­tive risks for the econ­omy such as the high level of non­per­form,ing loans (NPLs) in the bank­ing sec­tor, de­lay in re­forms and the im­pact from the Rus­sian econ­omy.

How­ever, the ERC, that is tasked with pro­duc­ing the monthly business and con­sumer con­fi­dence in­dex, also refers to the pos­si­ble ben­e­fits from last week’s ECB decision for quan­ti­ta­tive eas­ing, UK growth and in­vest­ments in tourism.

The Euro­pean Cen­tral Bank fi­nally agreed to em­bark on a ma­jor eq­uity buy­ing scheme in May that would mean in­vest­ing in about 120 mln euros worth of Cyprus bonds, con­di­tional to the is­land keep­ing up with the eco­nomic adjustment pro­gramme set out by the Troik of in­ter­na­tional lenders.

The ERC re­port said added that real GDP growth for 2014 is pro­jected at -2.2% as the de­cline in real eco­nomic ac­tiv­ity in the fourth quar­ter (y-o-y) is es­ti­mated at 1.4%.

The re­ces­sion is fore­casted to per­sist in 2015, but the con­trac­tion of real out­put is es­ti­mated to de­cel­er­ate con­sid­er­ably, it said, with real GDP growth fore­cast at -0.4%.

Real GDP is ex­pected to de­cline by 1%, 0.6% and 0.3% in the first, sec­ond and third quarters of 2015, re­spec­tively, and rise by 0.3% in the fourth quar­ter, com­pared to the same quar­ter of 2014.

The UCy re­port said that the de­cel­er­a­tion of the re­ces­sion is driven by the slow­down of the con­trac­tion of do­mes­tic ac­tiv­ity and em­ploy­ment; sta­ble/de­creas­ing do­mes­tic prices cou­pled with de­clin­ing in­ter­na­tional oil prices; strength­en­ing of do­mes­tic eco­nomic con­fi­dence and the favourable per­for­mance of the Cyprus Stock Ex­change in 2014; fur­ther strength­en­ing of sta­bil­i­sa­tion trends in the bank­ing sys­tem; and, ex­ter­nal fac­tors, such as the ex­pan­sion of real ac­tiv­ity in the euro area and the U.K. dur­ing the third quar­ter, and the weak­en­ing of the euro against the Bri­tish pound, which is ex­pected to in­flu­ence pos­i­tively do­mes­tic ac­tiv­ity and tourism.

Some re­cent de­vel­op­ments, how­ever, could weigh on ac­tiv­ity in Cyprus in cer­tain sec­tors, hin­der­ing ear­lier and stronger re­cov­ery.

Th­ese in­clude uncer­tain­ties about the euro area re­cov­ery re­flected by the his­tor­i­cally low lev­els of Euro­pean in­ter­est rates, the de­cline of the EU stock mar­ket re­turns and the weak­en­ing of the euro against the US dol­lar; a slow­down of the Rus­sian econ­omy and the rapid de­pre­ci­a­tion of the rou­ble against the euro; and, po­lit­i­cal and eco­nomic un­cer­tainty in Greece cap­tured by the neg­a­tive per­for­mance of the Athens stock ex­change and the ris­ing long-term in­ter­est rate on Greek gov­ern­ment bonds.

Do­mes­tic fac­tors which neg­a­tively im­pact on the ac­tiv­ity out­look in­clude the higher un­em­ploy­ment, the high lend­ing rates, low lev­els of fixed in­vest­ment, and high lev­els of pub­lic debt.

Ac­cord­ing to the ERC the ris­ing lev­els of NPLs, to­gether with de­lays in the im­ple­men­ta­tion of the rel­e­vant le­gal frame­work on fore­clo­sures and in the ef­fec­tive man­age­ment of such loans, could re­in­force tight credit con­di­tions with ad­verse ef­fects on con­fi­dence and the real econ­omy.

De­lays in the ad­vance­ment of agreed struc­tural re­forms and, in gen­eral, weaker com­mit­ment to the im­ple­men­ta­tion of the eco­nomic adjustment pro­gramme agreed with the Troika could dam­age eco­nomic con­fi­dence and cre­ate risks to fis­cal tar­gets and ac­tiv­ity, it said.

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