UCy re­vises GDP growth to 1.3%

Financial Mirror (Cyprus) - - FRONT PAGE -

The re­cov­ery of eco­nomic ac­tiv­ity in Cyprus is forecast to con­tinue in the fol­low­ing quar­ters, ac­cord­ing to the Eco­nomic Re­search Cen­tre of the Univer­sity of Cyprus, with real GDP growth for 2015 re­vised up­wards from 1.1% in Au­gust to 1.3%.

This is far more op­ti­mistic than Euro­pean Com­mis­sion and the IMF (0.5%) for 2015.

Real out­put is es­ti­mated to ex­pand (y-o-y) by 1.9% and 2.6% in the third and fourth quar­ters, re­spec­tively, the Oc­to­ber UCy monthly re­port said.

The pro­jected growth rates for the sec­ond half of 2015 should, of course, be in­ter­preted in the light of the low lev­els of GDP reached dur­ing the cor­re­spond­ing pe­riod in 2014, the UCy re­port said, adding that real GDP growth in 2016 is fore­casted at 1.5%, re­vised sig­nif­i­cantly up from 1.1% in the Au­gust sur­vey.

“The up­ward re­vi­sions to the fore­casts re­sulted from the strength­en­ing of y-o-y real GDP growth in the sec­ond quar­ter in Cyprus and in the EU as well as from fur­ther im­prove­ments reg­is­tered in a num­ber of do­mes­tic lead­ing in­di­ca­tors dur­ing the third quar­ter,” the monthly re­port said.

The main driv­ers of the pro­jected in­crease in real ac­tiv­ity are:

- Growth (y-o-y) in real GDP and em­ploy­ment ac­cel­er­ated in the sec­ond quar­ter. No­tably, the pickup in a num­ber of ac­tiv­ity-re­lated do­mes­tic lead­ing in­di­ca­tors con­tin­ued dur­ing the third quar­ter.

- Stronger growth in the euro area and steady growth in the UK dur­ing the sec­ond quar­ter, as well as fur­ther in­creases in Euro­pean eco­nomic sen­ti­ment in­di­ca­tors in the third quar­ter, sup­port the re­cov­ery in Cyprus.

- The re­cent re­duc­tions in do­mes­tic lend­ing in­ter­est rates amid con­di­tions of weak de­mand and el­e­vated un­em­ploy­ment are found to fa­cil­i­tate eco­nomic re­cov­ery. Fur­ther­more, the re­turn of do­mes­tic eco­nomic con­fi­dence to pre-cri­sis lev­els and the good fis­cal per­for­mance are es­ti­mated to con­trib­ute to growth.

- Lower in­ter­na­tional oil prices and in­fla­tion in the EU are ex­pected to ben­e­fit eco­nomic ac­tiv­ity in Cyprus through their ef­fects on real in­comes, and on both do­mes­tic and ex­ter­nal pro­jec­tions by the that weaker growth de­mand.

- The weak­en­ing of the euro against key cur­ren­cies, most no­tably against the Bri­tish pound, is ex­pected to boost do­mes­tic ac­tiv­ity in the fol­low­ing quar­ters through ex­ports, par­tic­u­larly tourism ser­vices.

- Fur­ther re­duc­tions in the Euro­pean lend­ing rates and in the bor­row­ing costs of euro area gov­ern­ments (with the ex­cep­tion of Greece) re­flect ECB’s ac­com­moda­tive mon­e­tary pol­icy stance, which is also back­ing the re­cov­ery process in Cyprus.

Down­side risks to the growth pro­jec­tions are as­so­ci­ated with the fol­low­ing:

- The high lev­els of non-per­form­ing loans pose ma­jor risks to the sta­bil­ity of the bank­ing sys­tem and to the out­look for the econ­omy. In­ef­fec­tive i mple­men­ta­tion of the new in­sol­vency and fore­clo­sure le­gal frame­work and bot­tle­necks in the in­tro­duc­tion of leg­is­la­tion for the sale of loans could de­lay the restora­tion of healthy credit con­di­tions and eco­nomic growth.

- De­lays in the im­ple­men­ta­tion of struc­tural re­forms agreed in the eco­nomic ad­just­ment pro­gramme (e.g. public ad­min­is­tra­tion, pri­vati­sa­tions, health sys­tem) may cre­ate risks to public fi­nances, Cyprus’s mar­ket bor­row­ing costs and, there­fore, to eco­nomic ac­tiv­ity.

- De­te­ri­o­ra­tion of the ex­ter­nal eco­nomic en­vi­ron­ment namely (i) the wors­en­ing of the out­look for the Greek econ­omy, (ii) the down­turn in Rus­sia and (iii) weaker than ex­pected growth in the euro area and the UK, as a re­sult of a slow­down in emerg­ing mar­kets, es­pe­cially in China, could pose risks to the re­cov­ery mo­men­tum in Cyprus.

Up­side risks to the eco­nomic out­look re­late to the fol­low­ing: (i) a longer pe­riod of lower oil prices with pos­i­tive ef­fects on con­sump­tion; (ii) lim­ited neg­a­tive spillovers from ad­verse eco­nomic de­vel­op­ments in Greece due to the re­cent weak­en­ing of the con­nec­tions be­tween the Cypriot and Greek bank­ing sys­tems; and (iii) in­vest­ment de­ci­sions linked mainly to tourism, energy and fi­nan­cial ser­vices as well as public in­vest­ment ef­forts for the ex­pan­sion/im­prove­ment of in­fra­struc­ture.

CPI in­fla­tion in 2015 is pro­jected at -2.1%, with 2016 CPI in­fla­tion es­ti­mated to re­main slightly be­low zero mainly driven by the lower in­ter­na­tional oil prices com­bined with slug­gish do­mes­tic de­mand.

“The fore­casts for CPI in­fla­tion are re­vised down­wards from -1.7% and 0.7% for 2015 and 2016 re­spec­tively, in the Au­gust is­sue, to -2.1% and -0.4% for the cur­rent and next year re­spec­tively. The down­ward re­vi­sions re­sulted from a larger con­trac­tion of the gen­eral price level in the third quar­ter com­pared to the first half of the year, driven mainly by lower energy prices and sub­dued do­mes­tic de­mand,” the UCy re­port said.

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