CYPRUS: Central bank revises downward GDP growth to 3.5%

The Central Bank of Cyprus (CBC) has revised its forecast for GDP growth for 2019 downward to 3.5% from 3.7% it estimated in December.

For 2020 and 2021 it expects economic growth to be driven by the continuous growth of domestic demand and forecasts further recovery over the next few years, however at a slower pace of 3.2% in 2021 (from 3.3% it previously forecast).

According to its updated macroeconomic projections, Cyprus’ GDP recorded an annual increase of 3.5% (seasonally adjusted) in Q1 2019, with the contribution of almost all the main productive sectors.

This reflects the slowdown in economic activity due to the imposition of restrictive measures on international trade and the growing uncertainty over external demand.

With regard to domestic factors, the CBC notes the downward revision of private consumption due to the effects of the introduction of contributions to the National Health System as of 1 March 2019, as well as the projected acceleration of loan repayments.

CBC said the expected growth rate for 2019 is based on domestic demand and notes that private consumption is expected to decelerate to 2.8%, despite wage growth, from 3.1% it expected in December.

This is primarily due to the increase in the contributions to the Social Insurance Fund and the introduction of contributions to the National Health System.

It also cited the projected acceleration of loan repayments due to the expected introduction of the Estia scheme, aiming to assist borrowers with non-performing loans collateralised with primary residences to repay their loans.

In addition, the CBC expects a slowdown of public consumption, which is expected to grow by 3.7%.

The CBC notes as positive the increase in new sustainable lending in the first quarter of 2019 at slightly higher levels compared to Q1 2018. This development is supported by historically low interest rates, robust economic activity and consequently increased demand for new loans.

An increase in wages is expected to have a positive impact on household savings, thus further enhancing the reduction of non-performing facilities and increasing the prospects of the Cypriot economy.

Further improvement of the conditions in the banking sector is predicted to have a downward impact on private debt, with a consequent positive effect on the real economy, said the Central Bank.

On public debt, the CBC notes that despite its increase to 102.1% in 2018, it is expected to decline significantly in the coming years due to estimates for strong fiscal surplus and the expected high growth rates.

On employment, CBC predicts a slowdown to 2.9% this year, while in 2020 and 2021 it expects further deceleration to 2.4%.

The unemployment rate is expected to drop to 6.9% in 2019, from 8.4% in 2018, to 6% in 2020 and to 5.6% in 2021.

Source: The Financial Mirror