EU Commission revises Cyprus’ 2023-2024 growth forecast upwards

The European Commission revised upwards its growth projection for the Cypriot economy in its Spring Forecasts, in relation to the corresponding interim winter forecasts. GDP growth forecasts are higher for both 2023 and 2024.

More specifically, in 2023, the Cypriot economy is expected to slow down from 5.6% in 2022 to 2.3% in 2023 and 2.7% in 2024. According to the Commission's winter forecasts, growth in 2023 was expected to reach 1.6% and to 2.1% in 2024.

The economy is set to be dampened by the still high inflation eroding the purchasing power of households, by higher interest rates negatively affecting investment, and by weakening growth momentum in Cyprus’ trading partners affecting external demand.

The partial indexation of wages implemented in January 2023 is set to somewhat cushion the negative impact on consumption. The implementation of the Cypriot Recovery and Resilience Plan is expected to support investment, notably in construction and equipment, over the forecast horizon. Tourism and other export-oriented services are projected to continue growing, although at a slower pace.

Cyprus is in the top ten countries with the highest growth rate among EU countries in 2023 and 2024, while the EU average is 1% and 1.7% for 2023 and 2024 respectively.

Labour market is improving

The unemployment rate decreased more than initially expected, to 6.8% in 2022, down from 7.5% in 2021.

It is forecast to slightly increase in 2023 to 6.9%, in line with the slowdown of GDP growth, before declining to 6.4% in 2024 as labour-intensive services sectors are set to continue expanding.

Inflation to moderate in 2023

Inflation reached a peak of 8.1% in 2022 on the back of soaring global commodity prices.

As global energy prices are moderating and supply chain disruptions are phasing out, inflation is expected to abate to 3.8% in 2023.

However, the partial indexation of wages is set to have some secondary upward effects. The expected moderation of global energy and other commodity prices is projected to reduce inflation further to 2.5% in 2024.

Projected budgetary surpluses

The budget is forecast to remain in surplus at 1.8% of GDP in 2023. Government revenue is supported by the continued strong performance of private consumption, corporate earnings growth and wage increases.

Increases in public wages and pensions are putting upward pressure on expenditure. The forecast assumes that the measures to mitigate the economic and social impact of high energy prices on household energy bills – amounting to 0.4% of GDP in 2023, compared with 0.7% in 2022 – will be fully phased out at the end of June 2023.

Budgetary developments in 2023 are also affected by the assumed complete phasing out of COVID-19 emergency temporary measures, which are estimated to have amounted to 0.3% of GDP in 2022.

For 2024, the budget surplus is expected to reach around 2.1% of GDP. The increase is driven by the projected full phasing out of the measures to mitigate the impact of high energy prices, implemented until June 2023.

The debt-to-GDP ratio is forecast to decrease over the coming years on the back of projected nominal GDP growth and primary surpluses. It is set to reach 80.4% by the end of 2023, and further decline to 72.5% in 2024, down from 86.5% in 2022.