ERC expects recession to persist in 2015 in Cyprus

ERC expects recession to persist in 2015 in Cyprus

The Center for Economic Research (ERC) of the University of Cyprus expects that the recession will persist in 2015, unlike the latest estimates by the European Commission and the International Monetary Fund (IMF) which refer to recovery of 0.4%, and the Central Bank`s assessment for a recovery of 0.8%.

Real GDP growth for 2015 is projected at – 0.4% and it is estimated to fall by 1.0%, 0.6% and 0.3% in the first, second and third quarters of 2015 respectively and to grow by 0.3% in the fourth quarter (compared with the same quarter of 2014).

Real GDP growth in Cyprus for 2014 is projected at -2.2% as the decline in real economic activity in the fourth quarter (y-o-y) is estimated at 1.4%.

Downside risks to the outlook relate to the rising levels of non-performing loans, together with delays in the implementation of the relevant legal framework and in the effective management of such loans, that could reinforce tight credit conditions with adverse effects on confidence and the real economy. Also, according to ERC delays in the advancement of agreed structural reforms and, in general, weaker commitment to the implementation of the economic adjustment programme could damage economic confidence and create risks to fiscal targets and activity. Another risk is further slowdown of the Russian economy and depreciation of the ruble against the euro, weakening of the recovery momentum in the euro area, as well as political and economic uncertainty in Greece.

Domestic factors which impact negatively on the activity outlook include the elevated unemployment rate, the relatively high lending interest rates reflecting tight domestic credit conditions, the historically low levels of fixed investment, and the high levels of public debt.

The amelioration of the recession is driven by the slowdown of the contraction of domestic activity and employment; (ii) stable/decreasing domestic prices coupled with declining international oil prices; (iii) the strengthening of domestic economic confidence throughout 2014 and the favourable performance of the Cyprus Stock Exchange in 2014; (iv) further strengthening of stabilisation tendencies in the banking system; and (v) external factors, such as the expansion of real activity in the euro area and the United Kingdom during the third quarter, and the weakening of the euro against the British pound, which is expected to influence positively domestic activity through tourism.

Some upside risks to the outlook are the accommodative monetary policy stance announced recently by the ECB which is expected to improve the liquidity of the domestic banking system with positive effects on the real economy. Eligibility for the ECB’s expanded asset purchase
programme is conditional on a positive review of the country’s economic adjustment programme. The monetary stimulus by the ECB is expected to strengthen confidence and demand in the euro area, influencing favourably domestic activity. Robust growth in the United Kingdom combined with the weakening of the euro against the British pound could benefit tourism. Investment decisions related mainly to the tourism sector may improve the medium-term prospects of the economy.