Cyprus Economic Forecast  2012-2014
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Cyprus Economic Forecast 2012-2014



Economic Forecast for Cyprus up to 2014. Main features of country forecast made in autumn 2012 by the DG ECFIN on behalf of the Commission.

Economic Forecast for Cyprus up to 2014. Main features of country forecast made in autumn 2012 by the DG ECFIN on behalf of the Commission.



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Cyprus Economic Forecast 2012-2014 Document Transcript

  • 1. 12. CYPRUS Deep recession to prevail over the forecast horizon demand. Exports are expected to fall moderately in Rapid deterioration in economic activity 2012, while the projected economic performance The weakness of economic activity seen in the of Cyprus major trade partners suggests a gradual second half of 2011 is expected to intensify in increase in exports of both goods and services in 2012, when the Cypriot economy is projected to 2013 and 2014. In services, both tourism and contract by 2.3% against the background of business services continued to perform well in unwinding imbalances and widespread loss of 2012 and this trend is expected to continue in the confidence among economic agents. The fiscal coming years. In particular, revenues from tourism consolidation effort that has been pursued, the are expected to continue to rise. This reflects a rapid deterioration in labour market conditions, projected increased flow of arrivals from Russia and the high degree of economic uncertainty have and new destinations helped by government together weighed heavily on private consumption. policies promoting tourism, and from tourists In addition, the tightening of credit conditions has concern over stability in competing Mediterranean aggravated the unfavourable economic tourist destinations. Exports of transport services environment while weak confidence has amplified are expected to shrink, while financial and other the drag on investment activity. Adverse business services will stagnate over the forecast developments in the external environment, horizon in view of worsen business confidence. particularly in Greece, and the sustained volatility Overall, the current-account deficit is expected to in European financial markets have affected narrow gradually over the forecast horizon in spite Cyprus predominately via developments in the of a deterioration of the income balance. financial sector. Graph II.12.1:Cyprus - GDP growth and contributions 12 6 The economy is projected to contract by 1.7% in pps. % of pot. GDP 2013, due to further declines in domestic 9 4 consumption, as well as in government and private 6 2 investments. Economic activity is expected to 3 contract further by 0.7% in 2014 with domestic 0 0 demand shrinking further and net exports still -3 -2 marginally supporting growth. Traditionally the -6 -4 main driver of growth, domestic demand is set to -9 forecast contract over the forecast horizon driven by -12 -6 01 02 03 04 05 06 07 08 09 10 11 12 13 14 markedly weaker consumer confidence and lower Output gap (rhs) Net exports household disposable income, which stem in turn Inventories Dom. demand, excl. inv. GDP (y-o-y%) from the effects of fiscal consolidation and the worsening labour market outlook. Investment is Worsening labour market conditions projected to decline in view of the difficulties in Employment is expected to worsen in 2012 and accessing credit and the high level of corporate subsequent years, reflecting the slowdown in indebtedness. In spite of the reconstruction work at economic activity. Job losses are particularly the electricity power plan and the private prominent in labour-intensive sectors such as investment in a new oil storage facility, construction and trade. The unemployment rate construction activity is expected to continue to would remain on a strong upward trend, rising shrink strongly in 2012 and 2013. Although from 7.9% in 2011 to 12.1% in 2012, and is likely construction indicators suggest that the correction continue to increase further in 2013 and to be close should persist in 2014, this is expected to be at a to 14% in 2014. Given the unfavourable labour milder pace reflecting the general level of market conditions and the effects of fiscal economic activity in the economy as a whole. consolidation, wage growth is expected to be negative. In particular, the freezing of public sector On the other hand, the external sector is expected wages until 2014 should affect wages in the to provide a positive contribution to growth for the economy as a whole. whole forecast period. In particular, imports of both goods and services are set to decline considerably against a backdrop of weak domestic76
  • 2. Member States, CyprusInflation declining conditions, and lower productivity. Furthermore, any worsening of the economic situation in GreeceHICP inflation is projected to decline to 3.2% in remains a significant downside risk for Cyprus as2012 on the back of weaker domestic demand and well as any further needs of recapitalisation for thethe fading-out of the base effect of the electricity domestic banks.prices increases in 2011 despite increasing oil andcommodity prices and of VAT standard rate by2 pps. With domestic demand remaining subdued, Fiscal and financing imbalances prevailthe effect of the VAT increase and the projected The general government deficit is set to narrow todecline of oil and commodity prices, headline 5.3% of GDP in 2012. Should no further measuresinflation is projected to ease further to 1.5% in be adopted, the deficit will rise further to 5.7%2013 and to 1.3% in 2014. GDP in 2013 and to 6% in 2014. The downgrading of the government sovereign to non-investmentSignificant downside risks exist grade raised yield spreads to prohibitive levels, with the government covering its financing needsCyprus requested external financial assistance through short-term borrowing from the domesticfrom the EFSF/ESM in view of the challenges market. The governments participation in thefacing the economy. Under the no-policy-change recapitalisation of a commercial bank (which wasassumption (the draft 2013 Budget not yet unsuccessful in implementing its capitalavailable), significant downside risks are present enhancement plan) is expected to increase thefor the current account, public finances, and the general government debt significantly from 71.1%financial sector, testing the economys in 2011 to about 90% of GDP in 2012. In view ofsustainability. Failure to raise the required capital shrinking economic activity, the government debt-and to put policies back on a sustainable path to-GDP ratio is projected to reach 96.7% in 2013could dramatically worsen the outlook and and 102.7% in 2014. The fiscal imbalances are setreinforce the negative loop of lower liquidity, to persist despite the significant consolidationhigher indebtedness, worsening labour market effort pursued in 2012.Table II.12.1:Main features of country forecast - CYPRUS 2011 Annual percentage change mio EUR Curr. prices % GDP 92-08 2009 2010 2011 2012 2013 2014GDP 17979,3 100,0 4,3 -1,9 1,3 0,5 -2,3 -1,7 -0,7Private consumption 11899,2 66,2 - -7,5 1,5 0,2 -3,4 -3,6 -0,9Public consumption 3584,2 19,9 - 6,8 1,0 -0,2 -1,7 -2,4 -1,5Gross fixed capital formation 2941,8 16,4 - -9,7 -4,9 -13,1 -22,0 -12,0 -5,3 of which : equipment 828,0 4,6 - -0,3 -5,9 -23,1 -26,0 -11,0 -3,7Exports (goods and services) 7699,0 42,8 - -10,7 3,8 3,3 -0,9 0,8 1,3Imports (goods and services) 8251,7 45,9 - -18,6 4,8 -4,1 -9,3 -5,5 -0,4GNI (GDP deflator) 16481,6 91,7 4,4 -4,9 2,4 3,6 -2,4 -1,7 -0,7Contribution to GDP growth : Domestic demand - -6,3 0,2 -2,4 -6,2 -4,4 -1,5 Inventories - -1,6 1,8 -0,5 0,0 0,0 0,0 Net exports - 5,7 -0,7 3,4 3,9 2,8 0,7Employment - -0,5 0,0 0,5 -4,0 -0,6 -0,3Unemployment rate (a) - 5,5 6,4 7,9 12,1 13,1 13,9Compensation of employees/head - 2,5 2,7 3,3 -0,9 -0,3 0,5Unit labour costs whole economy - 3,9 1,4 3,3 -2,6 0,8 0,9Real unit labour costs - 3,8 -0,5 0,5 -4,2 -0,7 -0,4Saving rate of households (b) - 11,4 11,6 4,1 5,2 7,3 7,5GDP deflator 3,4 0,1 1,9 2,7 1,6 1,5 1,2Harmonised index of consumer prices - 0,2 2,6 3,5 3,2 1,5 1,3Terms of trade of goods - 2,7 -0,9 -0,6 -1,7 -0,1 -0,9Merchandise trade balance (c) - -25,5 -26,8 -24,2 -21,9 -20,6 -20,7Current-account balance (c) - -10,7 -9,2 -4,2 -6,3 -3,5 -3,0Net lending(+) or borrowing(-) vis-à-vis ROW (c) - -10,6 -9,0 -4,0 -5,5 -2,7 -2,4General government balance (c) - -6,1 -5,3 -6,3 -5,3 -5,7 -6,0Cyclically-adjusted budget balance (c) - -6,2 -5,3 -6,1 -4,4 -4,8 -5,3Structural budget balance (c) - -6,2 -5,3 -5,9 -4,6 -4,8 -5,3General government gross debt (c) - 58,5 61,3 71,1 89,7 96,7 102,7(a) Eurostat definition. (b) gross saving divided by gross disposable income. (c) as a percentage of GDP. 77