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This week, the Central Bank of Cyprus (CBC) adjusted its GDP growth forecast for 2024 to 3 percent, up from the 2.8 percent projected in March, driven mainly by increased domestic demand. However, the forecasts for 2025 and 2026 remain unchanged at 3.1 percent and 3.2 percent, respectively.
“The GDP revision for 2024 is conservative, considering the strong economic results of the first quarter of this year, while also reflecting economic uncertainty due to the fragile external environment,” stated the CBC in its June 2024 macroeconomic projections for the Cypriot economy for the years 2024-2026.
Simultaneously, the CBC has slightly reduced its unemployment rate forecast for 2024 by 0.1 percentage points to 5.7 percent, while maintaining its projections for 2025 and 2026. The inflation forecast for 2024 has been increased by 0.1 percentage points to 2.1 percent but has been downgraded by 0.1 percentage points for 2025 and 2026. For core inflation, excluding energy and food prices, the CBC revised its 2024 forecast down by 0.1 percentage points to 2.5 percent, with similar downward revisions for 2025 and 2026.
The CBC also addressed potential deviations from its baseline GDP forecast, noting that “overall, the risks are balanced for 2024 given the conservative economic growth forecast.” It added that “for 2025-2026, risks lean slightly downwards, mainly due to the negative economic impact of ongoing geopolitical tensions and the fragile state of external demand.”
The CBC cautioned that “tighter-than-expected financing conditions could negatively impact domestic demand.” However, it acknowledged that “upward risks to the 2024-2026 forecasts could arise from higher-than-expected private consumption if household savings rates do not increase as anticipated.”
Concerning inflation, the CBC stated that “risks to the baseline inflation forecast are generally balanced for 2024 but slightly tilted upwards for 2025 and 2026,” citing potential “higher-than-expected energy prices and impacts related to climate change (such as tax policies and extreme weather events).” It also noted the possibility of “higher-than-expected wage increases, which could drive up service prices, higher-than-expected corporate profit margins, and stronger-than-expected private consumption.” On the downside, the CBC warned that “inflation could be lower than the baseline scenario due to a more significant reduction in domestic demand and economic activity if the impact of monetary policy proves stronger than expected, as well as due to increased geopolitical tensions.”
In the short term, the CBC projects a slightly faster GDP growth rate than previously forecasted in March 2024, driven by stronger-than-expected economic results in the first quarter of 2024, particularly in private consumption, investments, and exports of services such as tourism and technology services. Over the medium term, the CBC attributes the expected GDP growth primarily to rising domestic demand and a recovery in external demand anticipated from 2025 onwards. This growth will be supported by an increase in real disposable household income, stemming from the anticipated further decline in inflation, the ongoing impact of the eurozone’s unified monetary policy, wage increases, and the resilience of the labor market.
“The forecasted increase in service exports reflects the expected gradual improvement in external demand, as well as the dynamic growth of sectors like technology and shipping, which have significantly developed through foreign investments in recent years,” the CBC explained. It also noted that this growth “reflects the stabilisation of the impact of ongoing sanctions against Russia on the turnover of financial and professional services,” while the impact of the Middle East conflict, based on currently available data, “remains limited.”
For 2024-2026, the CBC’s projections indicate that GDP growth will primarily be driven by domestic demand, with significant contributions expected from major ongoing private investments, projects supporting digital and green development, and other reform initiatives under the Recovery and Resilience Plan. Furthermore, based on available data, the CBC sees no significant negative impact on investments from the Middle East conflict or restrictive monetary policies. It expects private consumption to slow but remain a key driver of economic growth in the coming years, reflecting the resilience of the labor market and the anticipated recovery in real disposable income.
In 2024, net exports are expected to negatively contribute to the economic growth rate due to the ongoing Russia-Ukraine war’s limited effects on the turnover of professional services and the anticipated loss of Israeli tourists. However, these dampening effects are projected to weaken over the medium term, supporting growth as market diversification efforts for tourism, financial, and professional services continue. Additionally, the expansion of the technology sector, driven by foreign companies established in Cyprus, is expected to continue contributing to GDP growth.
Compared to the March 2024 projections, the CBC notes “a slight upward revision of 0.2 percentage points in the GDP growth rate for 2024,” primarily due to “the upward revision of domestic demand and, to a lesser extent, the external demand driven by the dynamic export sectors such as technology.” Moreover, the CBC emphasized that “the GDP revision for 2024 is conservative, considering the strong economic results of the first quarter of this year, while also reflecting economic uncertainty due to the fragile external environment.”
In terms of the labor market, the Central Bank of Cyprus (CBC) reported that the labor market continues to support the Cypriot economy, with unemployment expected to decrease to 5.7 percent of the workforce in 2024, compared to 6.1 percent in 2023. “Despite the impact of the ongoing war in Ukraine, the unemployment rate recorded in the fourth quarter of 2023 was lower than expected, at 5.9 percent,” the CBC stated. It added that “recent surveys by the European Commission continue to show positive developments regarding employment expectations over the next three months.”
In conjunction with the anticipated GDP growth, the CBC forecasts that unemployment will further decline to 5.6 percent in 2025 and 5.3 percent in 2026, approaching conditions of full employment. Compared to the March 2024 forecasts, the CBC expects a slightly lower unemployment rate in 2024 by 0.1 percentage points, due to employment expectations over the next three months and the upward revision of the economic growth rate for 2024.
Regarding inflation, the CBC reported that inflation, measured by the Harmonised Index of Consumer Prices (HICP), is projected to decrease to 2.1 percent in 2024, compared to 3.9 percent in 2023. For the years 2025 and 2026, the HICP is expected to further slow to 1.9 percent and 1.8 percent, respectively. “The further decline of the HICP in both the short and medium term is expected to result from the continued weakening of inflationary pressures created in previous years by mainly exogenous supply factors, as well as from the impact of the eurozone’s single monetary policy, which continues to have a suppressive effect with a lagged effect,” the CBC said.
Additionally, the CBC notes that the expected normalization in both corporate profit margins and wage increases, along with the anticipated deceleration in the prices of non-energy industrial goods, are factors projected to contribute to the slowing of the HICP during the 2024-2026 period. In comparison to the March 2024 forecasts, “the slightly upward revision of the HICP by 0.1 percentage points in 2024 is mainly due to the upwardly revised energy prices and, to a lesser extent, services,” it noted.
The CBC also reported that core inflation, which excludes energy and food prices, is expected to decrease further compared to 2023 (3.8 percent). It is expected to reach approximately 2.5 percent, 2.1 percent, and 2 percent for the years 2024, 2025, and 2026, respectively. The CBC attributed the projected path of core inflation primarily to the continued suppressive impact of the eurozone’s single monetary policy and the full normalization of exogenous inflationary pressures that have influenced domestic prices of non-energy industrial goods in previous years. However, it noted that service prices are expected to continue exerting a persistent impact on core inflation during the 2024-2026 period, partially tempering the anticipated decline in core inflation due to the aforementioned factors.
Finally, compared to the March 2024 forecasts, the CBC noted that the slight downward revision by 0.1 percentage points in 2024 is mainly due to the most recent available data on the prices of non-energy industrial goods.
By fLEXI tEAM