Cyprus to see robust GDP growth in next 3 years — domestic demand and tech industry key factors

Cyprus to see robust GDP growth in next 3 years — domestic demand and tech industry key factors

The Central Bank of Cyprus (CBC) announced this week that it expects a 2.2 per cent increase in the country’s Gross Domestic Product (GDP) for the year 2023, following a substantial 5.1 per cent expansion in 2022.

Looking ahead to the years 2024-2026, the CBC projects GDP growth rates of 2.6 per cent, 3.1 per cent, and 3.2 per cent, respectively.

Constantinos Herodotou, governor of the CBC, said that “implementing reforms and focusing on sustainable development are decisive factors for further prosperity and progress in the country”.

Regarding the banking system, he noted that it “continued to maintain its resilience in 2023”.

According to macroeconomic predictions presented in the December 2023 Economic Bulletin of the CBC, formulated within the framework of Eurosystem forecasts with common labour assumptions, the expected slowdown in growth in 2023 is partly a result of the fragile external environment.

Other contributing factors include the impact of restrictive monetary policy on domestic demand, inflationary pressures affecting disposable income, and the effects of Russian sanctions on the business operations of service-providing companies.

The GDP growth for the years 2024-2026, according to the CBC, is primarily based on the recovery of domestic demand and, to a lesser extent, on net exports for 2025-26. This is within the context of the expansion of the business activities of foreign technology companies that have already established themselves in Cyprus in recent years.

The CBC also highlighted an expected correction in tourism revenues after the negative impact anticipated in 2024 due to conflicts in the Middle East, as part of the diversification of tourist markets.

Moreover, the CBC notes a minor impact from geopolitical tensions on the labour market, with a continued gradual reduction in unemployment to 5.3 per cent in 2026.

In terms of inflation, the Domestic Consumer Price Index (DCPI) is expected to significantly decrease to 4.0 per cent in 2023 from 8.1 per cent in 2022. Further decreases in the overall inflation rate are anticipated for the years 2024, 2025, and 2026, reaching 2.4 per cent, 2.0 per cent, and 1.9 per cent, respectively.

The CBC also expects a slowdown in core inflation to 3.9 per cent in 2023 from 5 per cent in 2022, with further deceleration projected for 2024, 2025, and 2026 at 2.6 per cent, 2.4 per cent, and 2.2 per cent, respectively.

According to the baseline scenario, risks to GDP are downward, while risks to inflation are balanced for the years 2024-26.

The CBC’s Economic Bulletin for December details that significant contributions to economic growth in the coming years are anticipated from large private investments currently underway.

Additionally, projects supporting digital and green development and other reform projects under the Recovery and Resilience Plan are expected to contribute.

The report indicates that housing investments are expected to rise due to the government’s interest rate subsidy scheme for new housing loans contracted by the end of 2021, with a disbursement period of 3 years.

The CBC acknowledges a negative impact from the expected reduction in demand and delays in the implementation of private investments by Israeli interests due to the conflict in the Middle East. Overall, investments are expected to increase by 6 per cent in 2023, 5.4 per cent in 2024, 6.7 per cent in 2025, and 5.4 per cent in 2026.

Private consumption, while predicted to slow to an annual rate of around 1.8 per cent for the years 2024-26 from 5 per cent in 2023, is expected to remain a significant driver of economic growth in the coming years.

The deceleration is primarily a result of the aforementioned base effect from the opening of the economy in 2022 following the lockdowns of 2021, economic uncertainty due to the conflict in the Middle East, and the expected gradual increase in the savings rate for loan repayment.

Unemployment expected to decline

The Central Bank of Cyprus also unveiled positive forecasts for employment, indicating a continued trend of improvement in the labour market. Despite ongoing tightness, the CBC said, signs of relaxation are emerging, according to the latest data.

The CBC expects that the impact of geopolitical tensions will be manageable, echoing the findings of the monthly surveys by the European Commission, which reflect expectations for employment over the next three months. These surveys show a rebound following the outbreak of the conflict in the Middle East.

For the year 2023, the CBC predicts a 1.6 per cent rise in employment, with a subsequent increase of 0.9 per cent in 2024. Further annual growth of 1.2 per cent is projected for the years 2025-26, in correlation with the positive trajectory of the Gross Domestic Product (GDP).

The CBC also noted that the trend of decreasing unemployment is expected to persist, reaching 6.4 per cent of the labour force in 2023, down from 6.8 per cent in 2022. In the following years, and in alignment with the further rise in GDP, unemployment is forecasted to approach conditions of full employment, reaching 5.3 per cent by 2026.

“The slight upward revision in unemployment for the years 2023-24 by 0.1 percentage points annually, compared to September forecasts, reflects the minor downward revision in GDP,” added the report.

The nominal spending per employee is predicted to increase by 4.6 per cent in 2023, with additional growth of 4.1 per cent, 3.1 per cent, and 3 per cent expected during the period 2024-26, respectively.

The trajectory of wages reflects the payment of a higher Cost of Living Allowance (CoLA), based on the previous year’s prices. Larger increases are also anticipated in collective agreements in certain private-sector segments due to inflation, yet it is not expected to lead to detrimental wage-price spiral mechanisms.

The CBC anticipates that productivity, following a 2 per cent increase in 2022, will slow down to 0.6 per cent in 2023 due to the job-rich economic expansion. However, in the years 2024-26, a recovery is expected, with growth rates of 1.6 per cent, 1.9 per cent, and 2 per cent, respectively.

As noted by the CBC, unit labour costs are expected to experience a further increase during the years 2023-26, accumulating around 8.5 percentage points. This is primarily attributed to expected increases in nominal spending per employee. Cyprus Mail

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