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CB: Recession deepens

07/12/2012 15:05
The Central Bank of Cyprus sees even deeper recession and shot of unemployment to 12%, according to the macroeconomic forecasts released today.

The CB has revised downwards its forecast for the Cypriot economy for both 2012 and 2013 mainly due to the recession and the adoption of fiscal consolidation measures under the Memorandum of Understanding.

The Central Bank expects the economy to shrink by 2.4% this year, unemployment to climb to 12% and inflation to 3.1%.

The estimate for the shrinkage of the economy is significantly revised from the previous estimate for shrinkage of 1.1%.

Economic activity will remain subdued in 2013. The economy is expected to show shrinkage of 3.5% against a growth of 0.4% that the previous estimate was.

As emphasized, the uncertainty in the domestic market in the past few months, especially after Cyprus' request for funding from the troika in June, has significantly influenced the developments of 2012, with most sizes recording historic lows. In 2013, the shrinkage is expected even greater due to the adoption of significant fiscal consolidation measures in the memorandum that has been preliminary agreed.

Also, it is noted that the consumer and business confidence remains at very low levels, while further shrinkage of the economic activity is expected until 2014.

The projected GDP growth "is expected to be severely affected by weak domestic demand, unfavourable financing conditions, the fiscal consolidation measures and the impact of the debt crisis on consumer and investor confidence”, the CB says.

Private consumption is expected to shrink by 4.8% in 2012 compared with a small increase of 0.2% in 2011.

In addition, public consumption - due to the measures taken or expected to be taken in the context of fiscal consolidation, particularly the permanent tiered reduction of wages in the public and broader public sector from the end of 2012 - is expected to record marginal annual decrease of 1% in 2012.

In 2013 and 2014, mainly due to additional measures on further reductions in wages in the public and broader public sector as well as reducing benefits and operating costs, a further shrinkage of 11.2% and 2.8% is anticipated respectively.

Gross fixed capital investments are expected to record significant decrease of 23.6% in 2012, despite the investments to rebuild the Vassiliko power station.

The negative economic climate that is expected to prevail during the remainder of 2012 and 2013-2014 is expected to affect employment significantly.

Employment in 2012 is expected to decline by 3.2%. In 2013 and 2014 we expect a further deterioration in the economic climate after the adoption of the fiscal consolidation measures under the MoU, so employment is forecast to fall further.

Regarding the unemployment rate, as defined by the EED, in 2012 is expected to rise to 12%, thus hitting a new historic high, while in 2013 and 2014 it will increase to 13.7% and 14.2%, respectively.

The new forecasts for employment and unemployment are more negative than the previous ones, as a result of the downward revision of GDP forecasts.

Further intensification of the debt crisis in the euro area, as well as deterioration in the anticipated growth in Cyprus’s major trading partners is expected to affect negatively the expected trend of domestic GDP.

More negative effects on economic activity from the fiscal measures and the direct and indirect taxes included in the MoU agreement can further affect GDP.

On the other hand, if the implementation of the measures is convincing and effective, uncertainty will be minimized and, together with the reorganization, restructuring and recapitalization of the banking sector and the improvement of liquidity in the market, important dynamics can be given in the domestic market.