04/05/2022 09:02
The University of Cyprus Economic Research Centre (ERC) downgraded its projection for Cyprus growth in 2022 due to the impact of the Russian invasion of Ukraine, warning over a potential deterioration in asset quality in the banking system due to rising inflation.
In its economic outlook for May 2022, the UCY ERC said that real GDP growth for 2022 is now estimated at 2.6%, 1.5 percentage points lower that its January forecast.
In 2023, real GDP growth is estimated to bounce back to 3.1%.
“Russia’s invasion of Ukraine and sanctions on Russia have weakened the outlook for Cyprus, mainly as a result of the expected collapse of tourist arrivals from Russia and Ukraine, rising international commodity prices, as well as weaker economic sentiment and less favourable financial conditions compared to the previous issue,” the ERC said, adding that risks to the growth outlook are to the downside.
Moreover, the ERC cautioned that “the war in Ukraine and sanctions against Russia could impact activity in Cyprus more adversely than indicated by the current forecasts,” adding that “moreover, the continuation of the war and tighter EU sanctions against Russia may weigh on growth prospects primarily through higher fuel, food and raw material prices.”
Additionally, the ERC said, new COVID-19 waves continue to pose significant downside risks to the outlook through new containment measures, and supply bottlenecks that exert upward pressures on prices.
“Additional policy support may be needed because of the war in Ukraine, the rising energy prices and the continuation of the pandemic,” the ERC said, pointing out that however, fiscal challenges in view of elevated public debt and monetary tightening may cloud the outlook.
Furthermore, the ERC said that the impact of the war in Ukraine on businesses in Cyprus together with the tightening financial conditions, in response to high inflation, could negatively affect bank asset quality, creating risks to the outlook.”
According to the ERC inflation (CPI) is projected to reach 4.8% in 2022 and to decline to 2.2% in 2023, revising its previous forecast by 2.2 percentage points for this year.
“Russia’s invasion of Ukraine and sanctions on Russia have intensified inflationary pressures through increases in international commodity prices, especially fuel and food prices,” the ERC said noting that the risks to the inflation outlook are to the upside.