ERC sees growth at 1.1% in 2015 and 2016

Financial Mirror (Cyprus) - - FRONT PAGE -

The Univer­sity of Cyprus Eco­nomic Re­search Cen­tre (ERC) said it ex­pects the econ­omy to grow 1.1% both this year and the next.

“Eco­nomic ac­tiv­ity is forecast to pick up fur­ther in the fol­low­ing quar­ters of 2015 and in 2016. Real GDP growth for 2015 is pro­jected at 1.1%. Real out­put is es­ti­mated to ex­pand (y-o-y) by 0.5% in the sec­ond quar­ter of 2015 and by about 1.8% in the sec­ond half of the year. The pro­jected growth rates for the sec­ond half of 2015 re­flect the low lev­els of GDP reached dur­ing the cor­re­spond­ing pe­riod in 2014,” the ERC said in its monthly Eco­nomic Out­look for Au­gust.

“Eco­nomic re­cov­ery is pro­jected to be rather slow as real GDP growth in 2016 is also forecast at 1.1%,” the Cen­tre added.

Ac­cord­ing to ERC fig­ures, the Con­sumer Price In­dex in­fla­tion is pro­jected at -1.7% and 0.7% for 2015 and 2016, re­spec­tively. “The neg­a­tive in­fla­tion pro­jec­tion for 2015 is driven by the lower in­ter­na­tional oil prices com­bined with slug­gish do­mes­tic de­mand. Low in­fla­tion is ex­pected in 2016 as do­mes­tic de­mand and oil prices are an­tic­i­pated to rise”.

The turn­around in do­mes­tic real eco­nomic ac­tiv­ity and em­ploy­ment in the first quar­ter of 2015 which was fol­lowed by fur­ther im­prove­ments in a num­ber of do­mes­tic lead­ing in­di­ca­tors in the sec­ond quar­ter, is one of the main driv­ers of the pro­jected re­cov­ery, cited by the ERC.

It added that the ex­pan­sion of out­put in the EU and the euro area in the first quar­ter of 2015 cre­ates a less ad­verse ex­ter­nal en­vi­ron­ment for Cyprus.

In ad­di­tion, lower in­ter­na­tional oil prices, in spite of the de­pre­ci­a­tion of the euro against the US dol­lar, as well as low in­fla­tion in the EU, leads to higher real in­comes and stronger ex­ter­nal de­mand.

Ac­cord­ing to the ERC, the faster weak­en­ing of the euro against the Bri­tish pound in the first half of 2015 is ex­pected to boost do­mes­tic ac­tiv­ity in the fol­low­ing quar­ters through tourism ser­vices, whereas the slow­down of the Rus­sian rou­ble de­pre­ci­a­tion against the euro in the sec­ond quar­ter has cre­ated less favourable con­di­tions for for­eign de­mand in Cyprus.

Re­cent re­duc­tions in do­mes­tic lend­ing in­ter­est rates amid con­di­tions of weak de­mand and el­e­vated un­em­ploy­ment are found to fa­cil­i­tate eco­nomic re­cov­ery, whereas the re­turn of do­mes­tic eco­nomic con­fi­dence to pre-cri­sis lev­els is es­ti­mated to boost growth in sub­se­quent quar­ters, the Cen­tre noted.

The ERC noted that down­side risks to the growth pro­jec­tions are as­so­ci­ated with the high level of non­per­form­ing loans, in­ef­fec­tive im­ple­men­ta­tion of the new in­sol­vency and fore­clo­sure le­gal frame­work and bot­tle­necks in the in­tro­duc­tion of leg­is­la­tion for the sale of loans and lack of progress with struc­tural re­forms agreed in the eco­nomic ad­just­ment pro­gramme (e.g. public ad­min­is­tra­tion, pri­vati­sa­tions, health sys­tem).

“The re­cent eco­nomic de­vel­op­ments in Greece, which have wors­ened the out­look for the Greek econ­omy, could have a di­rect neg­a­tive im­pact on the do­mes­tic econ­omy, but could also cause ad­verse ef­fects on Cyprus’s sov­er­eign bond yields through height­ened mar­ket un­cer­tainty,” the ERC said, adding that “the re­ces­sion in the Rus­sian econ­omy and rou­ble de­pre­ci­a­tion against the euro are likely to af­fect the out­look es­pe­cially for 2015”.

It said that “up­side risks to the out­look re­late to stronger growth in the euro area, solid growth in the UK com­bined with the weak­en­ing of the euro against the Bri­tish pound and a bet­ter than ex­pected eco­nomic per­for­mance in Rus­sia. More­over, the neg­a­tive im­pact of de­vel­op­ments in Greece on the Cypriot econ­omy could be short-lived as the con­nec­tion be­tween the fi­nan­cial sys­tems of the two coun­tries was lim­ited in 2013”.

Progress with the im­ple­men­ta­tion of the ad­just­ment pro­gramme in Cyprus pro­vides ac­cess to the ECB’s mon­e­tary stim­u­lus pro­gramme (ex­panded as­set pur­chase pro­gramme) safe­guard­ing the liq­uid­ity of the do­mes­tic bank­ing sys­tem, and de­cou­ples mar­kets’ sov­er­eign risk assess­ments for Cyprus from those for Greece, the ERC noted.

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