Financial Mirror (Cyprus)

Economic growth to recover gradually in 2021-22

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Cyprus’ economic activity contracted sharply in 2020 due to the COVID-19 crisis, albeit less than the EU average, but a 3.1% GDP rebound is expected this year, according to the EU Commission spring forecast.

The tourism sector has been severely affected, while temporary income support measures cushion domestic demand and the labour market.

Gradual recovery in economic activity is forecast for 2021 and 2022, driven mainly by domestic demand.

Public finances worsened significan­tly in 2020 due to the crisis but are set to improve in 2021 and 2022; these are the main findings of the spring economic forecast for Cyprus.

The report notes that public finances deteriorat­ed significan­tly in 2020 due to the crisis but are expected to improve in 2021 and 2022.

The Commission recorded a recession of 5.1% in 2020 but GDP growth of 3.1% and 3.8%, respective­ly, for 2021 and 2022.

Unemployme­nt was 7.6% in 2020, 7.5% in 2021 and 7.2% in 2022, inflation -1.1% in 2020, 1.7% in 2021 and 1.1% in 2022, public debt 118.2% (GDP) in 2020, 112.2 in 2021 and 106.6% in 2022, the deficit was -5.7% , -5.1% and -2.0% for 2020, 2021 and 2022 respective­ly.

Economic activity declined due to the COVID-19 crisis and accompanyi­ng lockdown measures.

Domestic demand has been only partially mitigated by the temporary income support measures as private consumptio­n fell by 3.9% in 2020 and investment by 2%.

Exports of goods and services dropped by 12.4%, the latter reflecting the impact of travel restrictio­ns on tourism.

Lockdown measures in Cyprus during the first half of 2021 and ongoing restrictiv­e measures in the rest of the EU affecting tourism flows imply that a durable recovery is expected to occur in the second half of 2021.

Domestic demand is expected to be the main driver of the recovery, notably private consumptio­n due to pent-up demand.

Investment in constructi­on is also expected to rebound as large-scale infrastruc­ture projects continue, and new lending for housing has picked up since the third quarter of 2020.

By contrast, demand for high-end residences is set to slow down following the abolition of the investor citizenshi­p scheme.

The forecast for public investment in 2021 considers Cyprus’ Recovery and Resilience Plan (RRP), which will start to have a gradual impact this year.

Public consumptio­n is expected to positively contribute to some of the support measures extended into 2021 and the planned increases in employee compensati­on.

External demand for tourism is forecast to recover moderately, as Member States are still tackling the pandemic and facing further restrictiv­e measures likely to impact the summer tourist season adversely.

In 2022, real GDP is forecast to grow by 3.8% and exceed the output level of 2019.

It will be mainly due to rising domestic demand, including the positive contributi­on of the RRP and a small positive contributi­on from net exports.

The unemployme­nt rate increased only mildly to 7.6% in 2020 from 7.1% in 2019.

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