In its Autumn 2023 report on Cyprus' economic outlook, the European Commission has presented a nuanced analysis of the country's post-pandemic recovery.

The report, based on the 15th post-programme surveillance mission conducted in late September 2023, indicates that Cyprus, despite showing resilience post-COVID-19, is expected to experience a slowdown in economic growth. Real GDP growth is projected to decelerate from 5.1% in 2022 to 2.2% in 2023.

The deceleration is attributed to factors such as the impact of the Russia-Ukraine conflict on external demand for financial and business services. However, domestic demand and tourism are expected to continue showing robust growth. Despite the slowdown, the report foresees moderate growth of around 3% for 2024 and 2025, driven by substantial investments in energy, education, health, and tourism, partly supported by the Recovery and Resilience Facility (RRF).

The labor market in Cyprus is described as robust, with employment expected to drive unemployment below 6% by 2025. Inflation, which was 8.1% in 2022, is anticipated to decelerate to 4.1% in 2023, with a further decline in the coming years. Persistent elevated core inflation, partially due to automatic wage indexation, remains a concern.

The fiscal position is considered strong, but the report highlights potential risks, particularly related to energy price surges and contingent risks from the banking sector. Cypriot banks have shown strong profits in the first half of 2023, boosted by higher policy rates. However, concerns persist about borrowers' capacity to service loans amidst increasing interest rates and living costs, posing moderate risks for the banking sector.

The report emphasizes the need for an effective foreclosure framework to manage Non-Performing Loans (NPLs) and maintain payment discipline. However, repeated suspensions of this framework have hampered its efficacy, impacting NPL reduction efforts and subsequently affecting the resilience of the banking sector.

Despite challenges, Cyprus is seen as maintaining a sound economic, fiscal, and financial stance overall. While short and long-term risks are low, medium-term risks are rated at a moderate level. The current account deficit has notably surged, projected to reach 9.6% of GDP in 2023, up from 7.9% in 2022. The deterioration is attributed to a decline in exports of business and professional services, largely linked to the Russia-Ukraine conflict.

Forecasts for 2023 suggest a further decline in the trade of goods due to increased ship registrations in the initial half of the year and robust domestic demand. Projections for 2024 hint at a marginal improvement, with the current account deficit reaching 8.8% of GDP, mainly driven by a slowdown in exports of non-tourism services. In 2025, a more significant recovery is anticipated, with the deficit shrinking to 7.5% of GDP, aligning with the expected global economic recovery, increased external demand, and an anticipated decline in energy and commodity prices.

By fLEXI tEAM