UCy more op­ti­mistic than EC in 2016-2017 growth pro­jec­tions

Financial Mirror (Cyprus) - - FRONT PAGE -

The Eco­nom­ics Re­search Cen­tre (CypERC) of the univer­sity said in its Eco­nomic Out­look for Jan­uary that “the re­cov­ery of eco­nomic ac­tiv­ity in Cyprus is fore­casted to con­tinue in the fol­low­ing quar­ters. Real GDP growth for 2015 is pro­jected at 1.5%. Real out­put growth for the fourth quar­ter of 2015 is es­ti­mated at 2.8%. Growth is ex­pected to gain mo­men­tum in 2016, as real GDP is fore­casted to ex­pand by 2.7%.”

The CypERC re­port de­tailed the main pro­jected in­crease in real ac­tiv­ity as:

- The growth rate (y-o-y) of real GDP and em­ploy­ment strength­ened in the third quar­ter of 2015, and many do­mes­tic lead­ing in­di­ca­tors con­tin­ued to im­prove dur­ing the fi­nal quar­ter of 2015.

- The re­cent re­duc­tions in do­mes­tic lend­ing in­ter­est rates, amid con­di­tions of weak de­mand and high un­em­ploy­ment, as well as stronger nor­mal­i­sa­tion ten­den­cies in the bank­ing sys­tem are fa­cil­i­tat­ing the re­cov­ery.

- Do­mes­tic eco­nomic con­fi­dence strength­ened in 2015, de­spite some short-lived set­backs re­lated to de­vel­op­ments in Greece; a fur­ther up­turn in all do­mes­tic sen­ti­ment in­di­ca­tors in the fourth quar­ter of 2015 is found to have im­proved the out­look.

- Lower in­ter­na­tional oil prices, down­ward pres­sures to the do­mes­tic ag­gre­gate price level and low in­fla­tion in the EU are ex­pected to as­sist re­cov­ery through their ef­fects on real in­comes and de­mand.

- Mod­est growth in the euro area and steady growth in the UK as well as fur­ther in­creases in Euro­pean eco­nomic sen­ti­ment in­di­ca­tors sup­port the re­cov­ery in Cyprus by cre­at­ing favourable for­eign de­mand con­di­tions.

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

- Re­duc­tions in the Euro­pean lend­ing in­ter­est rates dur­ing the se­cond half of 2015 re­flect the ECB’s



the ac­com­moda­tive mon­e­tary pol­icy stance, which is sup­port­ive of the re­cov­ery process in Cyprus.

Look­ing at the down­side risks to the growth pro­jec­tions, the CypERC re­port said that “the high lev­els of non­per­form­ing 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 could de­lay the re­sump­tion of healthy credit con­di­tions and ro­bust eco­nomic growth.”

The out­look added that “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, es­pe­cially af­ter the end of the eco­nomic ad­just­ment pro­gramme, and to ac­tiv­ity.”

It con­cluded that a fi­nal risk fac­tor was the “de­te­ri­o­ra­tion of the ex­ter­nal eco­nomic en­vi­ron­ment for Cyprus due to (i) the re­ces­sion in Rus­sia, (ii) weaker than ex­pected growth in the euro area and the UK, as a re­sult of a slow­down in emerg­ing mar­kets, es­pe­cially in China, and (iii) height­ened geopo­lit­i­cal ten­sions in east­ern Mediter­ranean.”

On the up­side, the CypERC out­look said that favourable fac­tors in­clude “a longer pe­riod of lower in­ter­na­tional oil prices lead­ing to lower en­ergy costs with pos­i­tive ef­fects on do­mes­tic ac­tiv­ity,” as well as “in­vest­ment de­ci­sions linked mainly to tourism and en­ergy, as well as pub­lic in­vest­ment ef­forts for the ex­pan­sion and/or im­prove­ment of in­fra­struc­ture.”

On the other hand, re­newed re­ces­sion in Greece is not likely to have neg­a­tive ef­fects on Cyprus due to the re­cent weak­en­ing of con­nec­tions be­tween the bank­ing sys­tems of the two coun­tries.

“The wors­en­ing of the Greek eco­nomic out­look alone is not ex­pected to re­verse the re­cov­ery in Cyprus,” the CypERC re­port said.

CPI in­fla­tion in 2016 is pro­jected at 0.3%, the re­port said, ex­plain­ing that the low in­fla­tion pro­jec­tion is driven by the lower in­ter­na­tional oil prices and by price de­clines in the in­ter­na­tional prices of non-en­ergy com­modi­ties com­bined with slug­gish do­mes­tic de­mand.

Look­ing ahead, it said that “in­fla­tion is pro­jected to pick up in the se­cond half of the year as ac­tiv­ity and de­mand will con­tinue to firm up.”

The CypERC fore­cast for real GDP growth for 2015 is re­vised from 1.3% in the Oc­to­ber is­sue to 1.5% in the Jan­uary out­look, based on quar­terly data avail­able up to the third quar­ter of 2015 and monthly in­di­ca­tors for the fourth quar­ter of 2015.

Thus, the growth fore­cast for 2016 is re­vised up­ward from 1.5% to 2.7% due to a higher than fore­casted real GDP growth rate in the third quar­ter in Cyprus, mod­est growth rates in the EU, as well as from fur­ther im­prove­ments reg­is­tered in a num­ber of do­mes­tic lead­ing in­di­ca­tors dur­ing the fi­nal quar­ter of 2015.

The fore­cast for CPI in­fla­tion in 2016 is re­vised up­wards from -0.4% in the Oc­to­ber is­sue to 0.3% in Jan­uary. The up­ward re­vi­sion re­sulted from a slower con­trac­tion of the gen­eral price level in the fi­nal quar­ter of 2015 com­pared to the third quar­ter of 2015 and from the pickup of do­mes­tic de­mand.

The fore­casts for 2015 and 2016 sug­gest that real ac­tiv­ity will con­tinue to im­prove. The growth fore­cast for 2015 is in line with the pro­jec­tion of the Cen­tral Bank of Cyprus; it is, how­ever, more op­ti­mistic than the fore­cast of the Euro­pean Com­mis­sion.

“Fur­ther­more, the fore­cast for 2016 points to faster growth than the rate pro­jected by the Cen­tral Bank of Cyprus and the Euro­pean Com­mis­sion,” the CypERC re­port said, con­clud­ing that “the econo­met­ric anal­y­sis based on the cur­rently avail­able data sug­gests that the eco­nomic re­cov­ery in Cyprus will con­tinue at a sim­i­lar pace in 2017.”

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