Central Bank of Cyprus Revises GDP Growth Forecast for 2024, Reflecting Limited Impact from Middle East Conflict

The Central Bank of Cyprus (CBC) has adjusted its GDP growth forecast for 2024 upwards to 3 per cent, reflecting an increase of 0.2 percentage points from its March 2024 projection. This revision, detailed in the CBC’s Economic Bulletin for June 2024, indicates that the impact of the ongoing Middle East conflict on Cyprus remains “limited,” and the risks of deviation from the GDP growth projections for 2024 “tend to be balanced overall.”

The CBC attributes this upward adjustment primarily to a rise in domestic demand, and to a lesser extent, external demand. The central bank highlighted the strong performance of export-oriented sectors, such as technology, as a contributing factor. “GDP is expected to grow at a slightly faster rate compared to the March 2024 projections due to the better-than-expected economic results of the first quarter of 2024, particularly in sectors like trade, tourism-related services, technology, and construction,” the CBC noted.

This revision is considered “conservative,” given the strong economic performance in the first quarter and available indicators for the second quarter. Nonetheless, the CBC acknowledged ongoing economic uncertainty due to the fragile external environment.

Looking ahead, the CBC projects GDP growth of 3.1 per cent in 2025 and 3.2 per cent in 2026, largely driven by anticipated increases in domestic demand and a recovery in external demand. The gradual absorption of funds from the European Union’s Recovery and Resilience Facility is expected to significantly support economic activity in Cyprus during this period.

The CBC’s analysis emphasizes that domestic demand will be bolstered by an increase in real disposable income for households, resulting from a decline in inflation due to the eurozone’s unified monetary policy, wage increases, and a resilient labour market. Major ongoing private investments, digital and green development projects, and other reform initiatives under the Recovery and Resilience Plan are also expected to contribute substantially.

Despite the overall positive outlook, the CBC identified several downside risks. “Downside risks are mainly associated with the negative impact of ongoing geopolitical tensions and the fragile course of external demand,” the CBC stated. These risks include potential higher energy prices due to the Middle East conflict and supply limitations by oil-producing economies, as well as stricter-than-expected financing conditions from previous interest rate hikes.

Additionally, the CBC flagged the risk of lower-than-expected absorption of investment funds from the Recovery and Resilience Facility, which could negatively impact growth. However, the CBC also identified some upside risks, noting that “upside risks to the forecast scenario for the 2024-2026 period are related to higher-than-expected private consumption if the household savings rate does not increase to the extent expected.”

The CBC’s June 2024 Economic Bulletin reported that the labour market remains resilient, with limited impact from geopolitical tensions, as evidenced by European Commission surveys on employment expectations. Employment is expected to increase by 1.6 per cent in 2024, with continued growth of 1.4 per cent annually in 2025 and 2026. Consequently, the CBC slightly revised its unemployment rate forecast for 2024 downward by 0.1 percentage points, expecting it to reach 5.7 per cent, down from 6.1 per cent in 2023, and to drop further to 5.3 per cent by 2026.

In terms of productivity, the CBC forecasts a continued recovery, with growth expected to be 1.4 per cent in 2024, 1.7 per cent in 2025, and 1.8 per cent in 2026. Unit labour costs are projected to rise cumulatively by 9 percentage points over the 2024-2026 period due to anticipated increases in nominal spending per employee, especially in the public sector in 2024. Despite this, Cyprus retains a competitive edge in unit labour costs relative to the eurozone, partly due to previous wage reductions under bailout obligations.

The CBC made a slight upward revision to its Harmonised Index of Consumer Prices (HICP) forecast for 2024, adjusting it to 2.1 per cent, mainly due to higher energy prices and service costs. The HICP is expected to decrease over the 2024-2026 period, reaching around the medium-term target of 2 per cent, with forecasts of 2.1 per cent for 2024, 1.9 per cent for 2025, and 1.8 per cent for 2026.

For core inflation, excluding food and energy prices, the CBC revised its 2024 forecast downward by 0.1 percentage points to 2.5 per cent, with further decreases to 2.1 per cent in 2025 and 2 per cent in 2026. These trends are attributed to the eurozone’s monetary policy impact and the normalization of wage growth. The CBC noted that downward pressure on core inflation is expected from weakening external inflationary pressures, although service prices will continue to exert upward pressure.

Overall, the CBC maintains a cautious but optimistic view of Cyprus’s economic trajectory, despite the identified risks and uncertainties.

By fLEXI tEAM