Cyprus Macroeconomic Outlook

The economy of Cyprus grew by 2.5% in 2023, from 5.5% in 2022, with last year’s print being the third best growth performance in the Eurozone. Investment was the main GDP growth driver (+19.5%), mostly in transport equipment (e.g. shipping). Robust household consumption (+4.3%) also supported growth, on the back of a tight labour market (unemployment at a 14-year low of 6.1%) and disinflation resulting to the fourth lowest inflation in the Eurozone in 2023 (3.9%). In contrast, the external balance deteriorated, mainly from a surge in imports (+5.1%) and, to a smaller extent, from a contraction in exports (-1.5%). However, as the rise in imports was linked to investment in shipping, it could improve the medium-term prospects of the economy. On the supply side, growth was based on various services sectors (information & communication, tourism, retail trade, transport) but also on construction.

Despite protracted monetary tightening by the major central banks and geopolitical tensions in the Middle East, GDP growth accelerated in Q1 2024 in Cyprus to 3.4%YoY/1.2%QoQ, from 2.3%YoY/1.0%QoQ in Q4 2023. Household consumption drove growth, while the external sector’s deficit weakened significantly due to base effects from the said investments in shipping a year ago. Major international institutions left their GDP growth forecasts unchanged for Cyprus in 2024. The IMF, in its World Economic Outlook (WEO) released in April, left the projection for this year unchanged compared to the previous WEO in October, at 2.7%. The European Commission, in its spring economic forecast released in mid-May, also left unchanged the growth projection relative to its winter forecast in February, at 2.8%. Our forecast for 2024 is slightly higher than the above, as we have updated it from 2.7% in our April 2024 Global & Regional Markets report to 2.9% since the May 2024 issue.

Domestic demand is expected to continue being the main source of GDP growth in 2024. However, this year, household consumption will be its most decisive determinant, supported by a further decline in unemployment, reflecting reforms in the labour market in previous years (e.g. incentives for third-country professionals) and continuing disinflation, albeit weaker than in 2023. Some of investment’s most significant components continued expanding in early 2024 (housing, other construction, intellectual property, linked to the ICT sector). Last year’s 16-year high in the volume of real estate sales, the restart of RRF financing this year and the return to credit expansion from the banking sector, concerning mainly non-financial businesses, are expected to underpin gross fixed capital formation, especially in the fields of energy, digital transformation and housing, but also in tourism and public infrastructure. That said, as a significant part of foreign and total buyers in the property sector comes from the Middle East, the current geopolitical tension in the region could disrupt the robust demand dynamics seen in previous years but Cyprus in the longer term could also benefit as a “safe haven” destination. Net exports will improve relative to 2023, mainly due to falling imports, while the outlook for goods exports remains uncertain. Exports of services are expected to show resilience. Indicatively, up to April this year, tourist arrivals were close to last year’s level, which neared the all-time high of 2019, but this year with a greater degree of market diversification than in 2023.

From the supply side of the economy, the sectors mostly expected to drive growth, not only this year but also in the medium-term, are: (1) ICT, on the back of related reforms (headquartering framework, incentives for third-country high-level professionals), (2) energy, through various major projects (Great Sea Interconnector, REPowerEU etc.), (3) transport-logistics, through an expanding shipping sector, but also cargo, oil and gas logistics services etc., and (4) tourism, with the potential for further growth from greater market diversification and development of the cruise branch. The construction sector will benefit from rising activity in all the above sectors, but also from a blooming real estate market in recent years, with which building activity did not keep up.

On the central issue of inflation that affects household consumption, the disinflationary measures adopted by the Government have led to its moderate weakening amidst rising energy costs, mainly in food and non-alcoholic beverages. Measures concerning meat and vegetables products since December 2023, eased inflation in this goods category from 2.7%YoY in November to 1.4%YoY in April. Meanwhile, headline inflation eased from 2.4%YoY in November to 2.1%YoY in January-April this year (excluding March, 1.6%YoY), despite recovering inflationary pressures in transport and housing, utilities and water supply. Given uncertainly about future dynamics in the energy products prices and their transport costs, a further extension of the disinflationary measures is considered possible, taking also into account fiscal overperformance in Q1 2024 (fiscal surplus of 1.9% of projected 2024 GDP vs. 1.3% a year ago).

Confidence in the continuation of strong fiscal and debt outcomes (highest fiscal surplus in the Eurozone in 2023, debt below its average) over the next few years, and strong medium-term economic growth prospects, in combination with increased confidence in the strengthening and deleveraging of Cyprus’ banking sector, led Moody’s Ratings in May to upgrade the outlook on the Government of Cyprus to positive from stable, while affirming the country’s long-term credit rating at Baa2, one notch above investment grade. In June, Fitch Ratings also raised Cyprus’ credit rating to BBB+, one notch above investment grade. This stream of upgrades, including also those by DBRS and Scope Ratings in the second half of 2023, further reinforces confidence in the prospects of the Cypriot economy and is expected to strengthen investment flows in the period ahead, decisively supporting the robust growth dynamics of the country.

By Michail Vassileiadis, Research Economist, Eurobank Research

(This article first appeared in the 2024 edition of The Cyprus Journal of Wealth Management, commissioned by Eurobank Cyprus and published by IMH. Click here to view the article. Click here to view the entire magazine online.)