Solid growth and improved economic sentiment in Cypriot economy

The European Union’s economy is set to avoid recession in 2023, but headwinds to development persist, according to the European Commission’s Winter interim Forecast which was presented in Brussels on Monday by Commissioner for the Economy, Paolo Gentiloni.

In Cyprus, real GDP continued its solid growth momentum, increasing by 6.1% in the first three quarters of 2022 compared to the same period in the previous year. Despite rising inflation, private consumption remained robust, supported by increased employment and wages, and underpinned by targeted government measures to compensate for high energy prices. Tourism also played a role as arrivals regained lost ground during the pandemic and reached 80% of the 2019-levels. In addition, exports of business services increased significantly. On an annual basis, real GDP growth is estimated to have increased by 5.8% in 2022.

Economic sentiment among consumers and businesses slightly improved in January 2023. The improved economic outlook among Cyprus’s trading partners is set to further support tourism, which is expected to almost reach the 2019-level. The 50% wage indexation, implemented in January 2023, is expected to somewhat support purchasing power. However, increasing interest rates are set to negatively affect corporate investments and residential construction. Elevated prices and tightening monetary policy are expected to weigh on real GDP growth, which is forecast to slow down to 1.6% in 2023, before accelerating to 2.1% in 2024.

HICP inflation reached 8.1% in 2022 fuelled by high energy prices and supply bottlenecks. HICP inflation is projected to decrease over the forecast horizon, as falling gas and oil prices ease energy inflation and supply disruptions attenuate further. By contrast, wage indexation is expected to exert some upward pressure on core inflation. Overall, HICP inflation is set to moderate to 4% in 2023 and to 2.5% in 2024.

On an EU level, the Commission notes that almost one year after Russia launched its war of aggression against Ukraine, the EU economy entered 2023 on a better footing than projected in autumn. The Winter interim Forecast lifts the growth outlook for this year to 0.8% in the EU and 0.9% in the euro area.

Both areas are now set to narrowly avoid the technical recession that was anticipated for the turn of the year. The forecast also slightly lowers the projections for inflation for both 2023 and 2024.