Economic growth for 2022 is expected to reach 5.8%, while GDP is expected to slow down to 2.5% in 2023 and grow by 3.1% in 2024 and 2025, according to the Central Bank’s macroeconomic projections.
The CBC in its December 2022 medium-term projections for the main macroeconomic variables in Cyprus for 2022-2025, released on Friday, said that unemployment in 2022 is expected to register a decline to 6.7% of the labour force, down from 7.5% in 2021. Inflation (Harmonised Index of Consumer Prices, HICP) is projected to rise significantly in 2022 to 8.1% from 2.3% in 2021 and structural inflation, i.e. inflation excluding energy and food, is expected to rise to 5.0% in 2022, up from 1.3% in 2021.
As noted, despite the ongoing effects of the war in Ukraine and the subsequent international sanctions imposed on Russia, the Cypriot economy has recorded significant growth of 6% in the first nine months of 2022, with the economic impact of the war expected to be more pronounced in the first half of 2023.
In particular, the CBC says that the downward revision of the external environment outlook due to the turbulence in international energy markets, has adversely affected consumer and business confidence, with the euro area expected to enter a mild and brief recession from the end of 2022 until the first quarter of 2023, which will also have an impact on the domestic market.
It is added that higher energy prices are expected to reduce income purchasing power, which, combined with rising interest rates, is expected to have a negative impact on domestic demand in 2023, while disruptions in raw materials and goods supply chains continue to affect economic activity and contribute to rising prices, with the gradual correction of disruptions expected around mid-2023.
The Central Bank notes that economic activity growth for 2022 is expected to reach 5.8%, following a significant 6.6% growth in the previous year, with GDP growth driven mainly by domestic demand (investment and private consumption), but also by a faster-than-expected recovery in the tourism industry, despite a negative contribution from the net exports side.
The projected resilience in domestic demand, the statement continues, stems from ongoing investment, the reopening of the economy after the acute phase of the pandemic, the continued inflow of foreign companies, particularly in the technology sectors, and, in part, the support to private consumption as a result of savings use.
It is added that the upward revision of 0.3 percentage points in 2022 compared to the September 2022 forecast is mainly due to the continued positive performance of economic activities, principally related to tourism and other services such as technology, while GDP growth is expected to slow down to 2.5% in 2023 and 3.1% in 2024 and 2025 respectively.
The Bank also states that there is no revision compared to the September 2022 forecasts, which is due to the already adopted downward revision of the external environment outlook, given the negative impact of the prolonged Russian-Ukrainian war and the energy crisis in Europe, with the continued inflow of foreign companies for international headquartering and/or expansion of their activities in Cyprus offsetting the initially projected medium-term scarring effects.
As for the individual indicators, the Central Bank says that unemployment in 2022 is expected to decline to 6.7% of the labour force compared to 7.5% in 2021, which is due, to the greater than expected tightness in the labour market and the expected manageable impact of the war as indicated by the European Commission’s recent monthly surveys on employment expectations for the next three months.
It is added that a continued downward trend is projected in the coming years, with unemployment reaching 6.5% in 2023, 5.9% in 2024 and approaching full employment conditions with 5.5% in 2025, with the remark that the non-substantial revision compared to the September 2022 forecast is due to the resilience of the labour market for the current year as evidenced by available data and the fact that the GDP trajectory for 2023 and beyond has not been substantially revised.
As for inflation (Harmonised Index of Consumer Prices, HICP), it is projected to rise significantly to 8.1% in 2022 from 2.3% in 2021, with the downward revision of 0.3 percentage points from the September 2022 forecast mainly due to lower-than-expected energy prices and relatively smaller-than-expected pressures on some services prices, partly offset by higher-than-expected food prices.
As in previous forecasts, the Bank continues, a gradual easing of inflationary pressures is projected over the period 2023-2025, with inflation at 3.3%, 1.7% and 1.8%, respectively, in the context of smaller but ongoing problems in supply chains and registered tightness in the labour market and HICP deceleration in the coming years also reflecting the stability of longer-term inflation expectations, while the downward revision for 2023 and 2024 is mainly due to lower than initially projected energy prices, in line with revised oil price forecasts.
Structural inflation, namely inflation excluding energy and food, is expected to rise to 5.0% in 2022, up from 1.3% in 2021, the Central Bank noted, adding that in 2023-2025 it is projected to ease to 2.9%, 2.2% and 2.1%, respectively, mainly due to the expected normalisation of disruptions in supply chains, in line with the impact of interest rate hikes on demand.
It is also noted that the small downward revision relative to the September 2022 projections is due to the relatively shorter duration of supply chain problems, in particular, the expected full normalisation in the middle rather than at the end of 2023, as well as due to slightly smaller than expected indirect effects from higher energy prices through lagged effects on inflation subcategories, as reflected in the most recent service price data.
In relation to the deviation probabilities from the baseline forecast scenario, the Bank reports that these tend to be slightly down for GDP and slightly up for inflation over the period 2023-2025, with the main downward risks to GDP related to the possibility of a worse-than-expected external environment outlook and larger and/or more persistent lagged effects from higher energy prices.
At the same time, the Bank states that upside risks include higher-than-expected performance in services exports, particularly due to the continued inflow of foreign companies to the island, while as regards inflation, upside risks stem mainly from larger and/or more persistent lagged effects from higher energy prices, with a possible wage-price spiral, coupled with higher long-term inflation expectations, being the main upside risk over the period 2024-2025 in particular.
Source: Cyprus News Agency