GDP growth to reach 2.4% in 2016, says UCy re­search

Financial Mirror (Cyprus) - - FRONT PAGE -

Growth in 2016 is ex­pected to strengthen, as real GDP is fore­casted to ex­pand by 2.4%, ac­cord­ing to the April eco­nomic out­look is­sued by the Eco­nom­ics Re­search Cen­tre of the Univer­sity of Cyprus.

The main driv­ers are an im­prove­ment in the labour mar­ket, fall­ing oil prices and in­ter­est rates, i mproved con­fi­dence and fis­cal im­prove­ment by the govern­ment.

On the neg­a­tive side, risks in­clude the high level of NPLs, stalling re­forms, un­cer­tainty in Europe and the Brexit, as well as a slow­down in the Rus­sian, UK and eu­ro­zone economies.

The y-o-y per­cent­age change of GDP is pro­jected at 2.2% and 2.1% for the first and sec­ond quar­ter of 2016, re­spec­tively, and at 2.7% for the sec­ond half of the year, the UCy monthly re­port said.

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

- The growth rate (y-o-y) of real GDP and em­ploy­ment strength­ened, while un­em­ploy­ment de­clined in the fi­nal quar­ter of 2015; many do­mes­tic lead­ing in­di­ca­tors con­tin­ued to im­prove in the first quar­ter of 2016.

- De­clin­ing in­ter­na­tional oil and non-en­ergy com­mod­ity prices that put downward pres­sures to the ag­gre­gate price level are ex­pected to ben­e­fit ac­tiv­ity through their ef­fects on real in­comes and de­mand.

- The downward trend in do­mes­tic lend­ing in­ter­est rates, amid con­di­tions of weak de­mand and el­e­vated un­em­ploy­ment as well as stronger nor­mal­i­sa­tion ten­den­cies in the bank­ing sys­tem, fa­cil­i­tate the re­cov­ery.

- Do­mes­tic eco­nomic con­fi­dence strength­ened fur­ther in the fourth quar­ter of 2015 and dur­ing the first quar­ter of 2016 lead­ing to an im­proved out­look for 2016.

- The fis­cal per­for­mance that has been bridg­ing the gap be­tween govern­ment ex­pen­di­ture and rev­enue is ex­pected to pos­i­tively con­trib­ute to a sus­tain­able re­cov­ery.

Strong eco­nomic con­fi­dence and the ex­pan­sion of ac­tiv­ity in the EU and the euro area - as well as the low lev­els of Euro­pean lend­ing in­ter­est rates - have been sup­port­ive of the re­cov­ery in Cyprus. Nev­er­the­less, some re­cent de­vel­op­ments in for­eign lead­ing in­di­ca­tors (con­fi­dence, zero/neg­a­tive in­ter­est rates, stock mar­ket re­turns) that pro­vide signs of a less favourable ex­ter­nal eco­nomic en­vi­ron­ment, are found to have some damp­en­ing ef­fect on do­mes­tic growth, re­veal­ing the vul­ner­a­bil­ity of the Cypriot econ­omy to global con­di­tions.

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

- The high lev­els of non-per­form­ing loans (NPLs) con­tinue to pose ma­jor risks to the sta­bil­ity of the bank­ing sys­tem and to the out­look for the econ­omy. In­ef­fec­tive im­ple­men­ta­tion of the new in­sol­vency and fore­clo­sure le­gal frame­work could de­lay the re­sump­tion of healthy credit con­di­tions and sus­tain­able eco­nomic growth; thereby, pro­long­ing the un­cer­tainty in the prop­erty mar­ket, which feeds back into banks’ bal­ance sheets.

- Loss of mo­men­tum in struc­tural re­forms may cre­ate risks to pub­lic fi­nances, Cyprus’s cred­i­bil­ity and mar­ket bor­row­ing costs.

- De­te­ri­o­ra­tion of the ex­ter­nal eco­nomic en­vi­ron­ment for Cyprus due to: (a) con­tin­u­a­tion of the re­ces­sion in Rus­sia (oil ex­porter) in con­di­tions of pro­tracted de­clines in oil prices; (b) weaker than ex­pected growth in the euro area as a re­sult of wors­en­ing global eco­nomic con­di­tions; and, (c) slower than ex­pected growth in the UK and fur­ther weak­en­ing of the pound against the euro as a re­sult of a global slow­down and the po­lit­i­cal un­cer­tainty re­gard­ing the fu­ture of the country in the EU.

- Po­lit­i­cal un­cer­tainty in Europe trig­gered by, for ex­am­ple, Bri­tain’s po­ten­tial exit from the EU or the han­dling of the refugee cri­sis, could lead to in­creased eco­nomic un­cer­tainty and un­der­mine eco­nomic con­fi­dence.

Up­side risks to the out­look re­late to a longer pe­riod of lower in­ter­na­tional oil prices, in­vest­ment de­ci­sions linked to the sec­tors of tourism and en­ergy as well as pub­lic in­vest­ment projects.

CPI in­fla­tion in 2016 is pro­jected at -0.8%. The neg­a­tive in­fla­tion pro­jec­tion is driven by fur­ther de­clines in in­ter­na­tional oil prices and lower in­ter­na­tional prices of nonen­ergy com­modi­ties com­bined with slug­gish de­mand.

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