Sta­bil­i­sa­tion ahead, growth at 0.4%, Rus­sia af­fects

Financial Mirror (Cyprus) - - FRONT PAGE -

The Cyprus econ­omy is show­ing signs of sta­bil­i­sa­tion, with mild growth rates of 0.4% this year and 1.6% in the next, but the im­prove­ment in eco­nomic sen­ti­ment in­di­ca­tors has come to a halt, ac­cord­ing to the Euro­pean Com­mis­sion’s Eco­nomic Fore­cast for Win­ter 2015.

While lower oil prices are ex­pected to sup­port growth, ex­ter­nal de­mand will suf­fer from head­winds from the Rus­sian econ­omy and fis­cal con­sol­i­da­tion is ex­pected to con­tinue, the fore­cast said.

The fore­cast fig­ures for Cyprus will be up­dated af­ter the sixth re­view of Cyprus’ Eco­nomic Ad­just­ment Pro­gramme has taken place, which has cur­rently been suspended due to a de­lay in the in­tro­duc­tion of a frame­work for fore­clo­sures and in­sol­ven­cies, an obli­ga­tion as part of the EUR 10 bln bailout plan with the Troika of in­ter­na­tional lenders.

Eco­nomic ac­tiv­ity de­clined by 1.7% y-o-y in the third quar­ter of 2014, a slight im­prove­ment rel­a­tive to the sec­ond quar­ter, driven by de­vel­op­ments in pri­vate con­sump­tion and in­vest­ment, in­clud­ing a one-off large pur­chase of trans­port equip­ment, which also boosted im­ports. Ex­clud­ing this trans­ac­tion, the growth mo­men­tum in both real im­ports and real in­vest­ment re­mained sub­dued, the EC fore­cast said.

Real ex­ports weak­ened in the third quar­ter, down 4.5% yo-y, which as­so­ci­ated with the tem­po­rary pick-up in im­ports has wors­ened the cur­rent ac­count.

Un­em­ploy­ment has been flat hov­er­ing around 16%, with con­tin­ued, al­beit slower, con­trac­tion in em­ploy­ment off­set by a fur­ther fall in labour force.

Against the back­ground of low ca­pac­ity utilisation and con­tin­ued wage ad­just­ment, in­fla­tion­ary pres­sures re­main weak. HICP in­fla­tion in 2014 has been sup­ported by prices of goods con­sumed by tourists, while prices of goods con­sumed by lo­cals have con­tin­ued to fall and en­ergy prices fell strongly as well in end-2014.

Eco­nomic sen­ti­ment re­mained broadly un­changed in the sec­ond half of 2014, putting on hold the im­prove­ment ob­served since April 2013. While con­sumer con­fi­dence con­tin­ued to im­prove, busi­ness sen­ti­ment in most sec­tors weak­ened with the ex­cep­tion of ser­vice sec­tor con­fi­dence which im­proved some­what.

Although re­tail trade in­di­ca­tors sug­gest an im­prov­ing growth mo­men­tum in the short term, this is off­set by weak­ness in short-term in­di­ca­tors for credit and tourist ar­rivals, in par­tic­u­lar Rus­sian tourists, re­flect­ing the neg­a­tive eco­nomic de­vel­op­ments in Rus­sia.

In 2015 and 2016, growth is fore­cast to re­sume only grad­u­ally as pri­vate do­mes­tic de­mand slowly picks up sup­ported by lower en­ergy prices, the EC fore­cast said.

GDP growth is ex­pected to reach 0.4% this year and 1.6% in 2016, af­ter a con­trac­tion of -5.4% in 2013 and -2.8% last year.

This should be ac­com­pa­nied by grad­ual delever­ag­ing of both house­holds and cor­po­rates and a re­duc­tion of the non­per­form­ing loans (NPL) ra­tio (now at close to 50%) down to more sus­tain­able lev­els. The mod­er­ate pick-up in do­mes­tic de­mand is ex­pected to be re­flected into im­proved labour mar­ket con­di­tions, with un­em­ploy­ment start­ing to ease grad­u­ally. HICP in­fla­tion is also ex­pected to re­main low, weighed down by re­cent de­clines in oil prices.

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