The Central Bank of Cyprus (CBC) has made an upward revision to its GDP growth forecast for 2024, adjusting the projected growth rate to 3 per cent, an increase of 0.2 percentage points from its March 2024 forecast.
This revision, published in the CBC’s Economic Bulletin for June 2024, reflects the bank’s assessment that the impact of the ongoing Middle East conflict on Cyprus remains “limited,” and that the risks of deviation from the GDP growth projections for 2024 “tend to be balanced overall“.
The CBC stated that this adjustment in the GDP growth forecast is driven mainly by an upward revision in domestic demand and, to a lesser extent, external demand.
The latter, the central bank explained, is influenced by the strong performance of export-oriented sectors, such as technology.
According to the CBC, “GDP is expected to grow at a slightly faster rate compared to the March 2024 projections due to the better-than-expected economic results of the first quarter of 2024, particularly in sectors like trade, tourism-related services, technology, and construction“.
The CBC added that this revision is “conservative,” considering the strong economic results in the first quarter of the current year and the available indicators for the second quarter, but also acknowledged the ongoing economic uncertainty due to the fragile external environment.
Looking ahead to 2025 and 2026, the CBC expects GDP growth of 3.1 per cent and 3.2 per cent, respectively.
This projected growth is largely attributed to the anticipated further increase in domestic demand and the recovery of external demand.
The CBC also highlighted the importance of the gradual absorption of funds from the European Union’s Recovery and Resilience Facility, which is expected to play a significant role in supporting economic activity in Cyprus during this period.
In its analysis, the CBC emphasised that domestic demand is expected to be bolstered by the increase in real disposable income for households.
This increase is anticipated to result from “the expected further decline in inflation, mainly due to the ongoing impact of the eurozone’s unified monetary policy, which has a lagged effect, coupled with wage increases and the resilience of the labour market”.
The bank also pointed out the significant contribution expected from major ongoing private investments, as well as projects aimed at supporting digital and green development and other reform initiatives under the implementation of the Recovery and Resilience Plan.
Despite the overall positive outlook, the CBC identified several downside risks that could impact economic growth.
Specifically, the CBC mentioned that “downside risks are mainly associated with the negative impact of ongoing geopolitical tensions and the fragile course of external demand“.
Additionally, the bank said that these risks are connected to the possibility of higher energy prices due to the Middle East conflict, as well as decisions by oil-producing economies to limit supply.
The CBC also flagged the potential impact of stricter-than-expected financing conditions, which could result from a more significant than anticipated effect of previous interest rate hikes.
These stricter conditions could dampen domestic demand and lead to higher-than-expected wage increases, further straining economic growth.
Moreover, the CBC pointed to the risk of a lower-than-expected absorption of available investment funds from the Recovery and Resilience Facility, which could also have a negative impact on growth.
On the other hand, the CBC also identified some upside risks to its GDP growth forecasts for the 2024-2026 period.
The CBC stated that “upside risks to the forecast scenario for the 2024-2026 period are related to higher-than-expected private consumption if the household savings rate does not increase to the extent expected.”
Turning to the labour market, the CBC’s June 2024 Economic Bulletin reported that the available data reflects “the continued resilience of the labour market, with the impact of geopolitical tensions remaining limited, as evidenced by monthly European Commission surveys regarding employment expectations for the next three months”.
In line with the positive GDP growth outlook, the CBC expects employment to increase by 1.6 per cent in 2024 and to continue growing by 1.4 per cent annually in 2025 and 2026.
In this context, the CBC made a slight downward revision to its unemployment rate forecast for 2024, lowering it by 0.1 percentage points from the March forecast.
This adjustment reflects the CBC’s expectations for employment over the next three months and the upward revision in GDP.
Unemployment is now expected to follow a downward trajectory, reaching 5.7 per cent of the labour force in 2024, down from 6.1 per cent in 2023.
The CBC expects that unemployment will approach full employment conditions in the coming years, dropping to 5.3 per cent by 2026.
In terms of productivity, the CBC forecasts a continued recovery following a 1 per cent increase in 2023. Productivity is expected to grow by 1.4 per cent in 2024, with further increases of 1.7 per cent and 1.8 per cent projected for 2025 and 2026, respectively.
The CBC also noted that unit labour costs are expected to rise cumulatively by 9 percentage points over the 2024-2026 period, mainly due to anticipated increases in nominal spending per employee, particularly in the public sector in 2024.
The CBC further stated that Cyprus’ unit labour cost levels retain a competitive advantage relative to the rest of the eurozone, partly due to wage reductions implemented under previous bailout obligations, which have subsequently improved competitiveness.
On the subject of inflation, the CBC made a slight upward revision to its forecast for the Harmonised Index of Consumer Prices (HICP) for 2024, adjusting it by 0.1 percentage points to 2.1 per cent.
This revision, compared to the March 2024 forecast, is mainly due to revised upward energy prices and, to a lesser extent, services prices.
The CBC forecasts that the HICP will continue to decrease over the 2024-2026 period compared to 2023, when it stood at 3.9 per cent.
The HICP is expected to hover around the medium-term target of 2 per cent, with forecasts of 2.1 per cent for 2024, 1.9 per cent for 2025, and 1.8 per cent for 2026.
Regarding core inflation, which does not include price changes from the food and energy sectors due to their volatility, the CBC has slightly revised its forecast downward by 0.1 percentage points for 2024 compared to its March 2024 projections.
This adjustment is mainly based on the most recent data related to the prices of industrial products, excluding energy.
The CBC said that core inflation is expected to decline to 2.5 per cent in 2024, down from 3.8 per cent in 2023, with further decreases projected to 2.1 per cent in 2025 and 2 per cent in 2026.
The CBC explained that these trends in core inflation are mainly due to the expected impact of the eurozone’s unified monetary policy, which continues to have a lagged effect over the medium term, along with the anticipated normalisation of wage growth.
The CBC also mentioned that downward pressure on core inflation during the 2024-2026 period is expected from the projected complete weakening of the external inflationary pressures that have affected domestic prices of non-industrial goods, excluding energy, in previous years.
However, the CBC also said that service prices are expected to continue exerting persistent upward pressure on core inflation during the 2024-2026 period.
Finally, the CBC explained that despite these pressures, the overall inflation outlook remains stable, with the CBC maintaining a cautious but optimistic view of the economic trajectory over the coming years.
