Con­trac­tion to con­tinue, re­bound in 2016

Financial Mirror (Cyprus) - - FRONT PAGE -

The re­ces­sion in Cyprus mod­er­ated sig­nif­i­cantly in 2014 with the sec­ond half of the year be­ing weaker than the first, the Euro­pean Com­mis­sion said in its Spring 2015 eco­nomic fore­casts.

Say­ing that the econ­omy will con­tinue con­tract­ing this year main­tain­ing a down­ward path that be­gan in 2012, the fore­cast ex­plained that low oil prices are ex­pected to sup­port growth in 2015 but ex­ter­nal de­mand will still be ex­posed to head­winds from the Rus­sian econ­omy.

“Re­cent progress on struc­tural re­forms should un­der­pin the eco­nomic re­cov­ery,” it said, adding that “fis­cal ad­just­ment is ex­pected to con­tinue.”

The Com­mis­sion down­graded its fore­casts, not­ing that the Cypriot econ­omy will con­tract with a rate of 0.5% com­pared to a 0.4% growth pro­jected in the win­ter fore­casts. Cyprus has been in con­tin­u­ous re­ces­sion since the third quar­ter of 2011.

The econ­omy con­tracted by 5.4% in 2013, fol­lowed by a con­trac­tion with a rate of 2.3 in 2014. Ac­cord­ing to the Euro­pean Com­mis­sion, Cyprus will con­tract by 0.5% in 2015, fol­lowed by 1.4% in 2016.

“Although avail­able short-term in­di­ca­tors for eco­nomic ac­tiv­ity in the be­gin­ning of 2015 sug­gest a slowly im­prov­ing growth mo­men­tum, the econ­omy is not ex­pected to grow be­fore 2016,” the Com­mis­sion said, not­ing how­ever that the down­side risks re­main tilted to the down­side ow­ing to high non-per­form­ing loans ra­tios and the re­ces­sion in Rus­sia that “could have larger neg­a­tive ef­fects than an­tic­i­pated.”

It added that gen­eral gov­ern­ment bal­ance will worsen in 2015, re­flect­ing the pro­longed eco­nomic re­ces­sion, im­pact­ing mostly on tax rev­enues, but also other fac­tors, such as lo­ca­tion rules re­gard­ing VAT for e-com­merce ser­vices and a de­crease in div­i­dend in­come from the Cen­tral Bank of Cyprus.

The Com­mis­sion noted that in 2016 the grad­ual delever­ag­ing of both house­holds and cor­po­rates should re­move im­ped­i­ments to a more bal­anced growth.

It added that the in­sol­vency and fore­clo­sure frame­work adopted in April should al­low for more ef­fec­tive tools to deal with the high ra­tio of non-per­form­ing loans and will help re­store the health of the bank­ing sec­tor, loosen credit sup­ply con­di­tions and sup­port a mod­er­ate pick-up in do­mes­tic de­mand.

Ac­cord­ing to the Com­mis­sion, public debt will marginally decline to 106.7% in 2015 from the peak of 17.5% in 2014 and will con­tinue its rise again at 108.4% in 2016.

“The en­su­ing growth mo­men­tum is ex­pected to grad­u­ally ease un­em­ploy­ment. HICP in­fla­tion is fore­cast to turn pos­i­tive in 2016, as en­ergy prices re­bound,” the Com­mis­sion said.

The Com­mis­sion

es­ti­mates

that un­em­ploy­ment will rise marginally at 16.2% in 2016 com­pared to 16.1% in 2014, whereas Har­monised in­fla­tion (HICP) will be neg­a­tive at 0.8% com­pared to 0.3% in 2014.

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