Central Bank of Cyprus (CBC) downgraded by 0.9 percentage points its forecasts for GDP growth in 2022, due to the negative effects of the war in Ukraine and the sanctions against Russia.
At the same time, its Governor did not rule out the deterioration of the quality of bank’s assets in Cyprus, due to the geopolitical crisis.
According to the June 2022 edition of CBC’s Economic Bulletin, Cyprus’ economy is projected to grow 2.7% in 2022, compared to 3.6% which was the forecast in December 2021.
“The greatest impact is expected on net exports, while domestic demand (private consumption and investments), show resilience due to the expected investments, but also the use of part of the savings accumulated during the pandemic”, it is noted.
At the same time, the CBC slightly downgraded its projections for GDP in 2023 and 2024, by 0.1 percentage point each, due to some scarring effects. Specifically, GDP is projected to grow by 3.6% in 2023 and by 3.7% in 2023, driven by continued recovery in domestic demand and net exports in 2023.
“The downward revision in the years 2023 – 24 is small, due to the expected significant support to economic activity from the absorption of funds from the EU Recovery and Resilience Facility (RRF),” the CBC Economic Bulletin adds.
Governor of CBC Constantinos Herodotou in his introductory statement points out that the “the degree of uncertainty, is still high and any current forecast may vary”.
He adds however that “the Cypriot economy may show even greater resilience to the effects of the war compared to the June 2022 forecasts, in case the positive developments in relation to consumer confidence and tourism continue, as demonstrated in recent relevant indicators”.
Non-performing loans
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Regarding the domestic banking sector, the CBC Governor points out that the immediate effects of the war do not appear to be a threat, as the direct exposure of the domestic banking sector to Russia and Ukraine is very low both in terms of deposits and loans.
However, he notes that although the effects of the pandemic on banks’ loan portfolios have not been as strong as initially expected, mainly due to the direct measures taken by the CBC, the ECB and the state’s the fiscal measures, “it is still early to rule out the possibility of a deterioration in the quality of the banks’ assets, especially taking into account the unfavorable economic developments due to the geopolitical crisis”.
Inflation
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Regarding inflation, the Harmonized Index of Consumer Prices (HICP) is expected to rise to 7% in 2022 compared to 2.3% in 2021
The CBC notes that its updated HICP forecasts show a significant upward revision, especially for 2022 (4.5 percentage points) and to a lesser extent in 2023-24 (1.6 and 0.4 percentage points, respectively).
“This is mainly due to the significant increases in energy prices, as well as the widening of inflationary pressures in the categories of food, services and industrial goods excluding energy,” it is added.
Unemployment
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According to the CBC, unemployment is expected to decrease to 6.9% in 2022, from 7.5% in 2021, however the projection for 2022 is slightly increased compared to the CBC’s forecast in December 2021.
The CBC sees a downward trend for unemployment in the coming years, coming closer to full employment conditions by 2024, with a rate of 5.7%.
Nominal cost per employee
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The CBC also sees a relatively small increase in nominal expenditure per employee in 2022 at 3.2%, compared to 4.7% in 2021, due to the automatic price indexation of wages (ATA) system and the ongoing implementation of existing collective agreements (hotels, constructions).
Larger increases are expected in 2023 and 2024, to 5.8% and 3.7% respectively, reflecting the payment of higher ATA due to inflationary pressures as well as the relatively larger increases expected in collective agreements.
Source: Cyprus News Agency