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UoC: 2016 growth to accelerate

26/01/2016 13:32
The projected economic growth rate for 2016 by the economics research center of the university of Cyprus has been substantially positively revised to 2,7% from 1,5% previously expected.

According to the report "Economic Outlook" published by the ERC, the recovery of economic activity in Cyprus is forecast to continue in the following quarters. Real GDP growth for 2015 is projected at 1.5% compared to 1,3% previously expected while real output growth for the fourth quarter of 2015 is estimated at 2.8%.

Growth is expected to gain momentum in 2016, as real GDP is forecast to expand by 2.7% compared to the previous estimate of 1,5%.

The main drivers of the projected increase in real activity are the growth rate (y-o-y) of real GDP and employment which strengthened in the third quarter of 2015, as well as many domestic leading indicators which continued to improve during the final quarter of 2015.

The recent reductions in domestic lending interest rates, amid conditions of weak demand and high unemployment, as well as stronger normalisation tendencies in the banking system facilitate the recovery.

According to ERS, domestic economic confidence strengthened in 2015, despite some short-lived setbacks related to developments in Greece as well as a further upturn in all domestic sentiment indicators in the fourth quarter of 2015 is found to improve the outlook.

Lower international oil prices, downward pressures to the domestic aggregate price level and low inflation in the EU are expected to assist recovery through their effects on real incomes and demand.
Modest growth in the euro area and steady growth in the UK as well as further increases in European economic sentiment indicators support the recovery in Cyprus by creating favourable foreign demand conditions.

"The weakening of the euro against key currencies, most notably the British pound, is expected to boost domestic activity in the following quarters through exports, particularly tourism services" it is noted while "reductions in the European lending interest rates during the second half of 2015 reflecting ECB’s accommodative monetary policy stance, is supportive of the recovery process in Cyprus".

Downside risks to the growth projections are associated with the high levels of non-performing loans which pose major risks to the stability of the banking system and to the outlook for the economy.
Also, the ineffective implementation of the new insolvency and foreclosure legal framework could delay the resumption of healthy credit conditions and robust economic growth.

Delays in the implementation of structural reforms agreed in the economic adjustment programme (e.g. public administration, privatisations, health system) may create risks to public finances, Cyprus’s market borrowing costs, especially after the end of the economic adjustment programme, and to activity.

Downward risks are also associated to the deterioration of the external economic environment for Cyprus due to the recession in Russia, the weaker than expected growth in the euro area and the UK, as a result of a slowdown in emerging markets, especially in China, and the heightened geopolitical tensions in eastern Mediterranean.

Upside risks to the outlook relate to a longer period of lower international oil prices leading to lower energy costs with positive effects on domestic activity, investment decisions linked mainly to tourism and energy, as well as public investment efforts for the expansion and/or improvement of infrastructure.

Renewed recession in Greece is not likely to have negative effects on Cyprus due to the recent weakening of connections between the banking systems of the two countries. Τhe worsening of the Greek economic outlook alone is not expected to reverse the recovery in Cyprus.

CPI inflation in 2016 is projected at 0.3%. The low inflation projection is driven by the lower international oil prices and by price declines in the international prices of non-energy commodities combined with sluggish domestic demand. Inflation is projected to pick up in the second half of the year as activity and demand will continue to firm up.