17.10.2022
The University of Cyprus Economic Research Center (CypERC) released an updated economic outlook report on Monday, noting that real GDP growth in 2022 is projected at 4.9%, up 2 percentage points from the center’s July release.
“The upward revision was the result of a strong increase in activity in the second quarter and robust demand in the third quarter, especially external demand for tourism services,” the center said in a report.
“However, the negative effects of the ongoing war in Ukraine on economic activity appear to be manifesting more slowly than previously thought, affecting the outlook for 2023,” the agency added.
The report explains that real GDP growth in 2023 is projected at 2.4%, down 0.4 percentage points from the forecast released in July.
The downward revision is primarily attributable to a number of factors, including sustained upward pressure on prices, worsening economic sentiment in the EU, weakening business confidence in the services sector in Cyprus, and higher interest rates on loans in euro area .
In addition, the report notes that the risks to the growth outlook are currently on the negative side, stating that “as monetary and fiscal policies normalize, the adverse effects of the ongoing war in Ukraine on economic activity could escalate.”
A further escalation of Russia’s war in Ukraine could increase upward pressure on commodity prices, prolong high inflation and deepen the energy crisis in Europe, further pushing up the cost of living and hurting growth,” the report said.
Moreover, growth in Cyprus could be lower than projected if the slowdown in both the European Union and the United Kingdom turns out to be more unfavorable than currently expected.
The center also explained that monetary tightening could pose risks to Cyprus’ domestic outlook if increases in sovereign borrowing costs and debt servicing costs for firms and households are sharper than expected.
“In view of the tightening of financial conditions, universal (instead of targeted) fiscal measures to counter the consequences of high inflation could undermine the fiscal position and cloud growth prospects,” the center noted.
“Furthermore, new outbreaks of COVID-19 in Cyprus and abroad may hamper economic activity due to possible containment measures and renewed supply chain disruptions,” the agency added.
Finally, consumer price index (CPI) inflation is projected at 8.6% and 3.4% for 2022 and 2023, respectively.
“The outlook for inflation is mainly driven by the recent pickup in inflation as a result of strong increases in global energy and food prices coupled with robust economic activity,” the report said.
“The depreciation of the euro against the US dollar and an upward revision in sales price expectations in the services sector also affected the inflation outlook,” the report says.
