31.06.2022
The Economic Research Center of the University of Cyprus (ERC) lowered its forecast for growth in Cyprus in 2022 due to the consequences of the Russian invasion of Ukraine, warning of a potential deterioration in asset quality in the banking system due to rising inflation.
In its economic outlook for May 2022, the UCY ERC said real GDP growth for 2022 is now estimated at 2.6%, 1.5 percentage points below its January forecast.
In 2023, real GDP growth is estimated to recover to 3.1%.
“The Russian invasion of Ukraine and sanctions on Russia have worsened the prospects for Cyprus, mainly as a result of the expected fall in the flow of tourists from Russia and Ukraine, rising global commodity prices, as well as weaker economic sentiment and less favorable financial conditions compared to the previous release. the ERC said, adding that risks to the growth outlook are downside.
Moreover, the ERC warned that “the war in Ukraine and sanctions against Russia could affect activity in Cyprus more adversely than current forecasts”, adding that “moreover, the continuation of the war and the tightening of EU sanctions against Russia could affect growth prospects primarily due to higher prices for fuel, food and raw materials”.
In addition, the ERC said new waves of COVID-19 continue to pose significant risks to the outlook due to new containment measures and supply bottlenecks that are putting upward pressure on prices.
“Additional political support may be needed due to the war in Ukraine, rising energy prices and the continuation of the pandemic,” the ERC said, noting that, however, fiscal concerns due to rising public debt and monetary tightening could cloud the outlook.
In addition, the ERC said that the impact of the war in Ukraine on businesses in Cyprus, together with tightening financial conditions in response to high inflation, could negatively impact bank asset quality, creating risks to the outlook.”
According to the ERC, inflation (CPI) is projected at 4.8% in 2022 and will fall to 2.2% in 2023, revising its previous forecast by 2.2 percentage points for this year.
“The Russian invasion of Ukraine and sanctions against Russia have increased inflationary pressures due to rising global commodity prices, especially fuel and food prices,” the ERC said, noting that the risks to the inflation outlook are in the positive plane.
