The recession in Cyprus has been milder than anticipated this year and a modest economic recovery is expected to begin in 2015 and strengthen in 2016 in line with the rest of the EU, the European Commission autumn forecast said recently.
The Cypriot government is satisfied with the EC predictions for the next year and the recession has completed its cycle. Unemployment is on a declining course after several years and the public finances are under control. This is also demonstrated by the relevant predictions of the Commission which refer to the positive rates of growth of the Cypriot economy for the next year and the recent sovereign upgrades by rating agencies, but also of the successful results of the stress tests of the island’s four systemic banks.
In 2015 and 2016, the economy is expected to gradually regain momentum, mainly driven by net export. Private consumption will remain subdued, reflecting weak wage growth and deleveraging from indebted borrowers. While the restoration of a sound and well-capitalized banking sector should gradually remove impediments to growth and allow for a gradual easing of the tight credit conditions, recovery is initially expected to remain largely credit-less and led by less leveraged sectors such as professional business services, and sectors with more solid turnover, such as tourism. Supported by improved competitiveness and a gradual increase in global demand, export growth is expected to be relatively strong and to become the main driver of growth in 2015-2016. In line with the expected recovery, unemployment should gradually decline, while HICP inflation is forecast to increase modestly.
In 2014, the general government headline and primary balance are projected to improve sharply by about 2% of GDP, despite the on-going recession. Revenue is expected to increase compared to 2013, driven by consolidation measures particularly on social contributions and taxes on production and imports, high dividends from the Central Bank of Cyprus (CBC) and improved tax collection. Together, these factors should more than offset the negative impact of slowing economic activity on the collection of taxes on income and wealth. Total expenditure is expected to remain on a decreasing path, despite an adverse impact due to called government guarantees. This largely reflects tight expenditure control, measures under Cyprus’ economic adjustment programme to reduce the public sector wage bill, and a moderation of early retirements in the public sector, which reduced the cost of lump-sum pension payments. The general government deficit is expected to stabilize in 2015 and to decrease significantly in 2016. The projections include dividend income from the CBC expected to amount to about 0.6% of GDP in both 2015 and 2016, to be distributed in line with the CBCs duties under the Treaties and the ESCB and ECB Statute. Cyprus debt-to-GDP ratio is expected to peak in 2015 at about 115% and to decline afterwards, supported by the economic recovery and the fiscal performance. Compared to the previous forecast, the debt-to-GDP ratio is positively affected by the upward revision of nominal GDP by about 10% due to the transition to ESA2010 and other statistical benchmark revisions.
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