Commission's Cyprus forecast: GDP growth and inflation slowdown

The European Commission’s Winter Interim Forecast has predicted GDP growth in Cyprus to increase by 2.8% in 2024 and by 3% in 2025, as well as a slowdown for inflation to 3.9% in 2023 (from 8.1% in 2022), mainly due to lower energy prices, as well as inflation moderating to 2.4% in 2024 and to 2.1% in 2025.

According to the predictions, included in this year’s Winter Interim Forecast published on Thursday, domestic demand is expected to continue being the main driver for real GDP growth in the next two years, as automatic wage indexation for around half of the employees holds up their purchasing power. At the same time, upcoming investment projects partly supported by the Recovery and Resilience Facility as also expected to boost growth.

Commissioner for the Economy Paolo Gentiloni, who presented the Winter Interim Forecast in a press conference in Brussels, said that the EU economy has entered 2024 on a weaker footing than expected. The forecast revises growth in both the EU and the euro area down to 0.5% in 2023, from 0.6% projected in the Autumn Forecast, and to 0.9% (from 1.3%) in the EU and 0.8% (from 1.2%) in the euro area in 2024. In 2025, economic activity is still expected to expand by 1.7% in the EU and 1.5% in the euro area.

Inflation is set to slow down faster than projected in the autumn. In the EU, Harmonised Index of Consumer Prices (HICP) inflation is forecast to fall from 6.3% in 2023 to 3.0% in 2024 and 2.5% in 2025. In the euro area, it is expected to decelerate from 5.4% in 2023 to 2.7% in 2024 and to 2.2% in 2025.

Economic Forecast for Cyprus

Real GDP growth in Cyprus slowed down to 2.5% in the first three quarters of 2023 (y-o-y) compared to 5.8% for the same period of 2022, mainly due to a lower external demand for non-tourism services. Still, demand for tourism services continued its rebound in 2023, with arrivals increasing by 20.1%, almost reaching pre-pandemic levels. Private consumption remained robust, supported by real wage increases and continued employment growth, up by 1.6%. For the entire 2023, economic activity is expected to have grown by 2.4%, slightly higher than in the Autumn 2023 Forecast, following 5.1% in 2022.

In 2024 and 2025, real GDP is expected to grow by 2.8% and 3% respectively, slightly stronger than forecast in autumn for both years. Economic sentiment among consumers and businesses slightly improved in January 2024.

Domestic demand is expected to continue being the main driver for real GDP growth in 2024 and 2025, as automatic wage indexation for around half of the employees (covered by collective agreements in the public and private sector) holds up their purchasing power.

Large investment projects in real estate, healthcare, transport and tourism, partly supported by the Recovery and Resilience Facility, are also set to boost growth. By contrast, the contribution of net exports is expected to remain weak due to the ongoing economic uncertainty in Cyprus’ main trading partners and to the strong import demand induced by investments.

HICP inflation slowed down to 3.9% in 2023, from 8.1% in 2022, mainly reflecting lower energy prices. HICP inflation is set to moderate to 2.4% in 2024 and to 2.1% in 2025, in line with an assumed continued expected decline in prices for energy and other commodities.

By contrast, wage indexation is expected to exert some upward pressure on HICP inflation excluding energy and food. Compared to autumn, the forecast for HICP inflation is revised down for 2024, but remains broadly unchanged for 2025.

(Source: CNA)