UCy revises GDP growth to 1.3%

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.