European Commission Report: Cyprus's Economic Outlook, Opportunities, and Risks

The European Commission has recently unveiled a comprehensive report detailing the economic outlook for Cyprus, painting a largely optimistic picture with expectations of GDP growth and a reduction in inflation. However, the report also underlines the significant risks associated with Cyprus's economic interconnections with both EU and non-EU nations.

As part of its assessment, the Commission conducted in-depth reviews (IDRs) for six member states, including Cyprus, examining various macroeconomic imbalances. Additionally, reports for six more member states are anticipated in the near future. These reviews delve into vulnerabilities such as high private, public, and external debt, as well as emerging risks and progress in policy implementation.

The selection of countries for review was based on specific economic indicators outlined in the Alert Mechanism Report (AMR) for 2024, which identified 12 member states warranting IDRs. The publication of these reports precedes the spring package to facilitate comprehensive discussions ahead of the issuance of country-specific recommendations within the European Semester framework.

The introduction to Cyprus's report emphasizes positive economic indicators, including stable growth and declining inflation. While GDP growth moderated to 2.4% in 2023, primarily due to weakened external demand triggered by geopolitical events such as Russia's invasion of Ukraine, forecasts suggest a rebound in 2024 and 2025. This resurgence is anticipated to be fueled by substantial investments in various sectors outlined in the National Recovery and Resilience Plan.

Inflation trends are also encouraging, with a decrease observed in 2023 and further declines projected for 2024 and 2025. The labor market exhibits resilience, characterized by a continual increase in employment and a corresponding decrease in unemployment, anticipated to drop below 6% by 2025. Furthermore, moderate growth in real wages is expected to follow the significant declines witnessed in 2022.

Cyprus's fiscal position remains robust, with a notable surplus recorded in 2023 and expected to be sustained in the following years, amid generally balanced economic risks.

However, the report underscores Cyprus's susceptibility to external economic dynamics, both within and beyond the EU. The nation's heavy reliance on Greek and Italian products and services, coupled with major export partnerships with countries like Greece and the United Kingdom, exposes it to secondary effects arising from economic developments in these regions.

In terms of external demand, Cyprus's economy is closely intertwined with those of Germany, the USA, and China, with domestic demand largely met by value added from the United Kingdom, Greece, and Germany.

In conclusion, while Cyprus enjoys favorable economic indicators, the report emphasizes the looming risks posed by geopolitical tensions and trade uncertainties, underlining the nation's high exposure to external economic influences.

By fLEXI tEAM