Cyprus's economy is anticipated to slow down in the face of tough external conditions

According to the European Commission's preliminary winter economic forecasts for 2023, delivered by Economy Commissioner Paolo Gentiloni in Brussels on Monday morning, the European Union's economy would avoid recession, but headwinds will remain a challenge.

After witnessing substantial growth in the first half of 2022, estimates predict a considerable downturn in economic activity towards the end of the year, owing mostly to global issues and ongoing inflationary pressures.

However, the research indicated that Cyprus's public finances are anticipated to remain solid, but with a smaller surplus than previously.

Unemployment is anticipated to fall to 7.2% in 2022, down from 7.5% in 2021, before stabilising in 2023 and falling to 6.9% in 2024.

Inflation is anticipated to reach 8% in 2022, up from 2.3 percent in 2021, before falling to 4.2% in 2023 and 2.5 percent in 2024.

According to pan-European projections, a year after Russia's invasion of Ukraine began, the EU economy will enter 2023 in better health than projected in the autumn, with growth of 0.8% in the EU and 0.9% in the eurozone.

Furthermore, both the eurozone and the EU are anticipated to escape a recession, but inflation expectations for 2023 and 2024 have been revised downward from original estimates.

In terms of growth, there was a downturn in the third quarter, but it was less severe than anticipated. In both the EU and the eurozone, the annual growth rate for 2022 is currently projected to be 3.5%.

The continuous diversification of energy sources and the decline in natural gas use have resulted in natural gas stockpiles being above the seasonal average of the preceding few years, at a time when wholesale natural gas prices are currently lower than before the war.

At the same time, the pan-European unemployment rate remained low, at 6.1% at the end of 2022, with January estimates indicating that economic activity will likely avoid a recession in the first quarter of 2023.

However, households and companies continue to endure high energy prices, while core inflation, which excludes energy and non-processed food, rose in January, further eroding household spending power.

Cyprus' GDP increased by 6.3% in the first half of 2022 compared to the same time in 2021, owing primarily to domestic demand.

Strong growth in private spending was fueled by job growth and money amassed during the pandemic.

At the same time, there was an increase in funding to support the National Recovery and Resilience Plan's execution.

However, increased material prices and tighter banking conditions harmed construction spending.

The tourism industry did well, with arrivals and revenue reaching approximately 80% and 90% of pre-pandemic levels, respectively, in the first quarter of the year.

Furthermore, exports of information, communication, and technology services, as well as financial and transportation services, increased in the first half of 2022.

According to the European Commission, growth would drop significantly after the fourth quarter of 2022 due to the global economic slowdown, rising interest rates, and increased pressure on pricing, particularly in the energy sector.

Furthermore, Cyprus's trading partners' limited purchasing power will weigh on service exports, particularly tourism.

Furthermore, the deterioration of consumer and business confidence in Cyprus, as well as the rise in interest rates, are having a negative impact on private consumption and household investment, a trend that is likely to worsen in 2023.

Targeted government actions to reduce the impact of rising energy prices, as well as the partial salary adjustment set to take effect in January 2023, are projected to boost purchasing power.

Wage increases affect around half of workers covered by collective agreements, limiting the negative impact on private consumption.

Furthermore, the National Recovery and Resilience Plan execution is expected to boost investments during the timescale utilised in the commission's prediction.

Overall, real GDP is predicted to increase by 5.6 percent in 2022, then fall to 1% in 2023 before increasing up somewhat in 2024 to reach 1.9 percent.

Significant uncertainties and risks to the economic prospects remain, however, because the tourist sector and other export-oriented service industries are especially exposed to external shocks.

The unemployment rate is predicted to fall marginally to 7.2% in 2022, down from 7.5% in 2021.

Employment and job vacancies increased in the first half of 2022, however the predicted slowdown in economic activity later this year will put a damper on the labour market's favourable performance.

The unemployment rate is expected to remain constant in 2023 before declining to 6.9 percent in 2024.

In Cyprus, headline inflation is anticipated to reach 8% in 2022, up from 2.3 percent in 2021.

This is primarily because of extraordinarily high oil costs, as Cyprus is heavily reliant on petroleum supplies.

Oil prices are likely to fall in 2023, but the partial wage adjustment will have an upward impact on core inflation. Overall, inflation is expected to fall to 4.2% in 2023 and 2.5% in 2024.

In terms of state finances, it has been claimed that fiscal performance in 2021 and 2022 was better than predicted, owing to the economic recovery. Cyprus is expected to earn a surplus equal to 1.1% of GDP in 2022.

Due to strong inflation, government revenue is predicted to expand dramatically, increasing by 10.2 percent in 2022. This rise is only partly mitigated by a 3.1% increase in government spending.

The phasing out of pandemic-related assistance measures for firms and workers has kept public spending growth modest.

At the same time, the cost of mitigating the consequences of high energy costs, namely the decrease of indirect taxation and subsidies on energy bills, is anticipated to be 0.7% of GDP in 2022.

Revenues from the government are likely to grow at a slower rate in 2023, reflecting the slowing of economic activity.

However, the budget surplus is expected to be around 1.1% of GDP in 2023 and 1.6% in 2024.

The fact that, despite the economic slowdown, the budget surplus is expected to stay basically unchanged in 2023 is owing to a predicted reduction in the cost of measures to alleviate the effects of high energy prices to 0.1 percent of GDP, as several of them are planned to expire at the end of 2022.

The debt-to-GDP ratio is likely to fall in the future years as nominal GDP grows in tandem with primary surpluses.

According to the commission, Cyprus' debt-to-GDP ratio is predicted to reach 89.6% by the end of 2022, before decreasing to 84% in 2023 and 77% in 2024.

By fLEXI tEAM