The Central Bank of Cyprus (CBC) has revised its GDP growth forecast for 2024 upwards by 0.2 percentage points, now expecting growth of 3.7 per cent.
The revision is attributed to stronger domestic demand, with private consumption playing a central role, supported by the ongoing resilience of the Cypriot economy.
However, the CBC also revised its forecasts for 2025-2026 downwards, due to increased imports required to meet the higher domestic demand.
While exports, particularly non-tourism services, continue to support growth, they do not fully offset the rising imports.
The labour market is also showing resilience, with unemployment forecast to decrease to 5 per cent in 2024, down from 5.8 per cent in 2023.
This trend is expected to continue, with unemployment gradually falling to 4.9 per cent in 2025, 4.7 per cent in 2026, and 4.6 per cent in 2027, nearing full employment conditions.
This decline in unemployment is closely linked to the economy’s growth dynamics.
Compared to previous forecasts, a slight downward revision of 0.1 percentage points was recorded due to the revision in GDP growth.
Inflation, measured by the Harmonised Index of Consumer Prices (HICP), is expected to decrease to 2.2 per cent in 2024, down from 3.9 per cent in 2023, approaching the medium-term target of 2 per cent.
This stabilisation is attributed to a reduction in external inflationary pressures, such as higher energy and raw material prices, as well as the continued impact of the single monetary policy, which continues to exert a lagged effect.
Meanwhile, wage increases are expected to be limited, preventing significant inflationary pressures. The gradual implementation of a carbon tax from 2025 may cause small increases in fuel prices.
The normalisation of industrial product inflation excluding energy from 2025 to 2027, compared to 2022-2023, is expected to contribute to the aforementioned stabilisation of inflation around 2 per cent.
Core inflation, which excludes energy and food, is expected to decrease further from 3.8 per cent in 2023, with forecasts for 2024, 2025, 2026, and 2027 being 2.6 per cent, 2.0 per cent, 1.9 per cent, and 2.0 per cent, respectively.
In addition, the CBC said that the price of services is expected to slow down in 2025-2027.
Compared to September 2024 forecasts, a slight upward revision of 0.1 percentage points for 2024 is due to the upward revision of inflation in services for the same year.
The economic outlook comes with balanced risks for 2024, while slightly increased downside risks are projected for 2025-2027.
These downside risks are mainly linked to ongoing geopolitical tensions and potentially lower-than-expected external demand, which is intertwined with increased uncertainty regarding global trade policy.
Domestically, the upcoming implementation of taxation on multinational profits may negatively affect economic prospects.
Additionally, slower-than-expected easing of financing conditions may negatively impact domestic demand.
Upside risks to the forecast for the period 2024-2027 are linked to higher-than-expected private consumption due to a possible smaller-than-expected increase in the household savings rate.
Regarding inflation, risks of deviation from the baseline scenario are considered balanced for 2024 and slightly tilted upwards for the period 2025-2027.
The upward risks mainly stem from potential escalation of geopolitical tensions and uncertainty surrounding global trade policy, which could drive energy prices and shipping costs higher, disrupting global trade.
Moreover, the impacts of climate change could lead to higher energy, food, and other structural inflation prices.
Upside risks are also associated with potential higher-than-expected wage increases, which could push service prices upwards.
On the other hand, the CBC mentioned that inflation may be lower than expected due to a slower-than-anticipated easing of financing conditions, as well as heightened geopolitical tensions that could worsen the global economic environment unexpectedly.
