The growth momentum of the Cypriot economy is expected to moderate in 2019 and 2020, according to the revised estimates of Economics Research Centre.
Real GDP growth is projected to slow from 3.9% in 2018 to 3.4% in 2019 and to remain at 3.4% in 2020. The outlook is forecast to remain favourable due to domestic and external factors, such as robust activity and employment growth in Cyprus in the previous quarters, higher-than-expected growth in the euro area and the UK in the first quarter of 2019, supportive external financial conditions, low inflation, strong fiscal performance in Cyprus, and further progress in the domestic banking sector. Recent developments in business and consumer survey data reflect lower expectations of activity growth in the euro area and the UK, as well as the absence of broad-based confidence gains in Cyprus, weakening the growth momentum in the following quarters.
Downside risks to the projections may stem from slower progress with private sector deleveraging and slower progress with the reduction of NPLs. The newly proposed changes to the law on foreclosures are expected to cause delays in the foreclosure procedures and limit the effectiveness of the legal tools. Such amendments may intensify downside risks to the outlook by renewing instability in the banking system, undermining Cyprus’ credibility, denting investor and depositor confidence, and weakening repayment discipline.
The high level of public debt together with the strong link between bank and sovereign risk, poses risks to the outlook, especially if amendments to the law on foreclosures similar to those recently proposed are enacted. Also, upward pressures on public expenditure (e.g. from the public sector wage bill and/or the newly introduced General Health System) may weaken the outlook.
Downside risks could arise from higher uncertainty surrounding the UK’s exit from the EU, weaker-than-expected growth in the UK and the euro area, and geopolitical tensions in the Eastern Mediterranean.
Upside risks to the outlook are associated with a higher degree of materialisation of investment plans (e.g. investments relating to tourism, property developments, shipping) than that reflected in the predictors.