GDP down, inflation up amid geopolitical uncertainty, UCy ERC projects

The Economic Research Centre (ERC) of the University of Cyprus has downgraded its forecasts for Cyprus' GDP growth in 2023 and 2024 and revised its inflation forecast upwards in its October Economic Outlook bulletin.

According to the bulletin, real GDP growth in Cyprus is forecast to slow from 5.1% in 2022 to 2.4% in 2023, before picking up to 2.8% in 2024. GDP growth in Cyprus decelerated further in the second quarter of 2023, resulting in a lower-than-expected growth rate. Consequently, the growth forecasts for 2023 and 2024 have been downgraded by 0.6 and 0.1 percentage points, respectively, compared to the July issue.

Tightened credit conditions, elevated prices, and a slowdown in the economies of Cyprus' trading partners have all contributed to the domestic growth challenges. Indicators related to external demand in the third quarter indicate a further softening of domestic activity.

However, the report does point out some positive factors supporting the growth outlook, including favourable labour market conditions, strong business confidence, growth in new business loans, improvements in stock market indices, and a robust fiscal performance.

Inflation expectations shifting

-----------------

The bulletin also highlights changes in the inflation landscape. Inflation, as measured by the Consumer Price Index (CPI), is predicted to decrease from 8.4% in 2022 to 3.9% in 2023 and further to 2.6% in 2024. These changes are attributed to tighter credit conditions, past declines in international commodity prices, and domestic inflation trends. As the reports notes, the decline in CPI inflation in Cyprus between the second and third quarters was marginal.

However, price developments have shown recent upticks, especially in September, leading to a revision in inflation forecasts. For 2023, inflation expectations have been adjusted upwards by 0.9 percentage points, and for 2024, by 0.6 percentage points.

Geopolitical uncertainty increases

---------------

Furthermore, the October economic outlook bulletin adds the increase in geopolitical uncertainty compared to previous projections. It notes that this heightened uncertainty can potentially impact economic activity and prices in Cyprus in the coming quarters. The specific effects of these geopolitical developments remain uncertain and pose both downside and upside risks to the country's economic outlook, it says.

(Source: CNA)