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Commission: Cypriot economy was a positive surprise

14/07/2022 15:14

The faster than expected recovery of the tourism sector, as well as the expansion of exports of other services, contributed to surprising positive developments for the Cypriot economy during the first quarter of 2022, according to the the European Commission’s Summer 2022 Economic Forecast.

According to the forecast for Cyprus, tourist arrivals during the first months of the year reached about 75% of pre-pandemic levels, while tourism prospects remained positive.

However, the forecast notes that weakening consumer confidence will result in a slowing down of consumption for households during the second half of the year, also predicting a further rise in inflation.

The Commission also predicts GDP growth for Cyprus to reach 3.2% in 2022 and 2.1% in 2023, mainly due to domestic demands and export of services. At the same time, the construction section is expected to be affected negatively.

On a more general note, uncertainty and risks remain due to the effects of the Russian invasion against Ukraine and the evolution of the COVID-19 pandemic.

Growth slowed down in the EU due to war

At EU level, the Summer 2022 interim economic forecast projects that the EU economy will grow by 2.7% in 2022 and 1.5% in 2023. Growth in the euro area is expected at 2.6% in 2022, moderating to 1.4% in 2023. Annual average inflation is projected to peak at historical highs in 2022, at 7.6% in the euro area and 8.3% in the EU, before easing in 2023 to 4.0% and 4.6%, respectively.

The slowdown is caused by upward pressures on energy and food commodity prices which are feeding global inflationary pressures, eroding the purchasing power of households.

Also, the EU economy remains particularly vulnerable to developments in energy markets due to its high reliance on Russian fossil fuels, and weakening global growth detracts from external demand. Momentum gathered with the rebound of last year and a somewhat stronger than previously estimated first quarter is set to prop up the annual growth rate for 2022. Still, economic activity in the remainder of the year is expected to be subdued, notwithstanding a promising summer tourism season.

Summer 2022 forecast for Cyprus

The Cypriot economy surprised on the upside in the first quarter of 2022, mainly as a result of the faster-than-expected recovery of tourism and the continuing expansion of exports of other services, notably business services and IT. 

Tourist arrivals and revenue increased considerably in the first months of 2022 and reached around 75% of pre-pandemic levels. The prospects for the sector remain positive for the summer season, based on data about planned international flights and surveys on reservations for tourist accommodation, despite a sizeable loss of the historically important tourism from Russia.

However, weakening consumer confidence combined with soaring inflation and increasing interest rates are expected to result in a considerable slowing down of households’ consumption and investments in the second half of the year.

On an annual basis, real GDP growth is forecast at 3.2% in 2022 and 2.1% in 2023. The main drivers of growth are expected to be domestic demand and, albeit to a lesser extent, net exports of services. Investment, notably in construction, is expected to suffer from the gradual tightening of financial conditions, persistent supply disruptions and exceptionally high prices for construction materials.

On the positive side, the implementation of the Cypriot Recovery and Resilience Plan is expected to support investment. Private consumption is projected to be adversely affected by high inflation and the erosion in purchasing power, even though households’ income is supported by measures adopted by the government to address high energy prices and the partial indexation of wages to be applied in January 2023.

Significant uncertainty and downside risks to the growth outlook remain, in particular as tourism and other export-oriented services sectors are vulnerable to the adverse global impact of Russia’s ongoing war of aggression against Ukraine and to the evolution of the COVID-19 pandemic.

High energy prices are driving up inflation. HICP headline inflation is forecast to average 7% this year and to decelerate to 3.3% in 2023, in line with the assumption that price pressures from tight commodity markets will ease next year. The projection for next year takes into account the impact of the partial automatic indexation of wages.