Commission expects robust growth in Cyprus the next two years in Autumn 2024 Economic Factors

The European Commission expects growth in Cyprus to remain robust in 2025 and 2026, according to the Autumn 2024 Economic Forecast which was presented in Brussels.

The Commission expects annual growth in Cyprus to be at 3.6% for 2024, and growth to continue by 2.8% and 2.5% over the next two years. Inflation is expected to decelerate from 2.2% this year to 2.1% and 2.0% in 2025 and 2026. Unemployment is also expected to drop from 4.9% this year to 4.7% in 2025 and 4.5% in 2026.

Also, the Commission assesses the implementation challenges of some large investment projects as one of the main risks to the country’s fiscal outlook, since these projects may burden public budget through called guarantees and other claims.

On the EU level, the Commission’s forecast points to a return to modest growth after a prolonged period of stagnation, while the disinflation process continues. The European Commission's Autumn Forecast projects GDP growth in 2024 at 0.9% in the EU and 0.8% in the eurozone. Economic activity is forecast to accelerate to 1.5% in the EU and to 1.3% in the eurozone in 2025, and to 1.8% in the EU and 1.6% in the eurozone in 2026.

Headline inflation in the eurozone is set to more than halve in 2024, from 5.4% in 2023 to 2.4%, before easing more gradually to 2.1% in 2025 and 1.9% in 2026. In the EU, the disinflation process is projected to be even sharper in 2024, with headline inflation falling to 2.6%, from 6.4% in 2023, and to continue easing to 2.4% in 2025 and 2.0% in 2026.

“The European economy is slowly recovering” outgoing Commissioner for the Economy, Paolo Gentiloni, said, noting that inflation continues to ease and private consumption and investment growth pick up, with unemployment “at record lows” and  growth set to “gradually accelerate over the next two years”.

“However, structural challenges and geopolitical uncertainty weigh on our future prospects. Member States will have to walk a narrow path of bringing down debt levels while supporting growth, aided by the new economic governance framework and the continued implementation of NextGenerationEU. Looking ahead, strengthening our competitiveness through investments and structural reforms is crucial to lift potential growth and navigate rising geopolitical risks” he added.

The forecast for Cyprus

Cyprus’ growth is expected to remain robust in 2025 and 2026. Inflation is projected to decelerate and wage growth to stay high, boosting household purchasing power and consumption. The government budget balance is set to remain in surplus, supported by continued strong growth in revenue and moderate increases in expenditure.

Real GDP growth was resilient in the first half of 2024, expanding by 3.6% y-o-y. This was primarily driven by private consumption, which increased by 4.5%. Investment, excluding the volatile registration of ships and aircraft, grew by 4.8% y-o-y, supported by a positive sentiment in the construction sector. Strong foreign demand for services, particularly in sea transport and tourism, led to a solid export performance. For 2024 as a whole, growth is projected at 3.6%.

According to the European Commission, this positive momentum is expected to continue, with economic growth forecast at 2.8% in 2025, and 2.5% in 2026. Investment is set to keep benefitting from the funds of the Recovery and Resilience Facility, and easing financial conditions are expected to provide a further stimulus. Export performance is projected to continue to benefit from growing tourist receipts and a dynamic outlook for services, particularly related to ICT. The ongoing recovery in household purchasing power due to an increase in nominal wages and declining inflation, is expected to boost private consumption.

HICP inflation is expected to converge to 2.0% over the forecast horizon, reflecting a gradual easing of base effects in particular for food, and declines in domestic energy prices. Services inflation is expected to remain elevated, mainly due to high nominal wage growth and increasing demand especially for tourism.

The current account deficit remains elevated but is projected to decline, to reach 8.2% of GDP in 2026. This declining trend is set to be supported by strong tourism flows and sustained improvements in the trade balance, despite persistently high net outflows of primary income resulting from the repatriation of profits by foreign-owned corporations.

Downside risks to the outlook persist. Ongoing tensions in the Middle East could disrupt supply chains and increase production costs. The tourism sector, a key contributor to the external balance, remains vulnerable to those risks. Additionally, energy prices pose a threat due to Cyprus's high oil dependence and limited integration with the European electricity market.

Employment grew by 2.7% y-o-y in the first half of 2024, reflecting increased hiring in tourism and the public sector. Over the same period, the unemployment rate fell by one pp., reaching 4.9% by the end of the second quarter. This is the lowest level in the last 15 years.

Skills mismatches and labour market slack remain limited, partly due to the influx of foreign workers benefiting from the incentives provided under the government’s initiative to attract multinational business to set up their base on Cyprus (headquartering). Employment is projected to grow by 1.9% in 2024, with a slight moderation at 1.2% by 2026. The unemployment rate is, projected to decline further and reach 4.5% in 2026.

The government surplus is expected to remain solid over the forecast horizon. In 2024, the surplus is projected at 3.5% of GDP in 2024, up from 2% in 2023. The budget balance of 2023 includes the temporary negative impact of 1.1% of GDP from the statistical treatment of some retroactive payment to civil servants’ pension fund, which is eliminated in 2024.

Further improvements of the 2024 surplus are stemming from revenue growth which is set to outpace the increasing expenditure throughout the year. Improved labour market conditions and higher contribution rates for employers and employees as of January 2024 contribute to increasing budget revenue from social security contributions.

Higher receipts from corporate income tax, personal income tax and VAT are also expected to boost tax revenue, which is forecast to increase by around 11% overall. Public wage expenditure is projected to grow by more than 11%, primarily due to inflation indexation and higher social contribution rates for civil servants.

Public investment is expected to remain high as RRP projects are maturing and other EU funds of 2021-2027 programming period are gaining speed. Investment financed by national state budget is expected to somewhat decrease.

The budget surplus is forecast to remain but to be lower at 2.7% of GDP in 2025 and 2026, as tax revenue increases are set to moderate in line with incomes and consumption and collection of tax arrears is assumed to flatten. At the same time, ad hoc increases in public wages adopted at the end of 2024 and measures to support housing are expected to be the main drivers of the growing expenditure in 2025.

The government debt-to-GDP ratio was at 73.6% in 2023. This figure was revised down by around 4 pps after the benchmark update of nominal GDP for the period 1995-2023. The revision incorporates statistical and methodological changes that had a level-shift impact on the entire forecast profile The debt-to-GDP ratio is expected to continue declining to 66.4% of GDP in 2024 and to 56.7% in 2026, largely due to primary surpluses and continued strong nominal GDP growth.

Risks to fiscal outlook arise mainly from implementation challenges of some large investment projects, such as the construction of a liquified natural gas terminal, that may burden public budget through called guarantees and other claims. Positive developments may include continued improvements in tax administration and collection of tax arrears.

(Source: CNA)