Central Bank of Cyprus Revises Growth Rate Downwards for 2023 and 2024
Inflation Rate Forecasted at 3.9% for 2023 and 2.7% for 2024
The Central Bank of Cyprus has slightly revised its growth rate projections downwards for the years 2023 and 2024. In its latest macroeconomic forecasts released this September, the CBC anticipates the Cypriot GDP growth rate to settle at 2.4% for 2023 and 2.7% for 2024. This is a slight decrease from the June predictions of 2.6% and 2.8% respectively.
The CBC explained that the marginal downward revision is partly due to the ramifications of sanctions resulting from the ongoing war, which has impacted the business cycle of professional services. This is combined with the negative effects of a fragile international environment on the trajectory of non-tourism services.
According to the CBC, between 2023 and 2025, the anticipated trajectory of the GDP primarily hinges on domestic demand. Significant contributions are expected from major private investments currently underway. Additionally, initiatives supporting digital and green growth, as well as other reformative projects under the Recovery and Resilience Plan, play a vital role.
Residential investments are also projected to be a contributor, thanks to the government's interest subsidy scheme for new housing loans approved up to the end of 2021, with a disbursement period of three years.
While private consumption is expected to slow down, it remains a crucial driver for economic growth in the coming years. The CBC clarifies that the slowdown stems from the so-called 'base effects' due to the economy reopening after the 2021 lockdowns and a gradual increase in savings rates to repay loans.
It's worth noting that net exports for the years 2023-24 are expected to negatively impact economic growth.
Simultaneously, the ongoing, albeit slower, expansion of foreign companies that have recently established in Cyprus, especially those in the technology sector, as well as the continual rise in tourism revenues, offset the negative impact of sanctions due to the ongoing war on the professional services sector.
In addition, the CBC has revised its inflation predictions upwards. Specifically, the Harmonized Consumer Price Index forecasts for 2023 and 2024 have been increased by 0.6 and 0.4 percentage points respectively, resulting in a new projected inflation rate of 3.9% for 2023 and 2.7% for 2024. This upward adjustment is attributed to the anticipated higher prices for energy and food, as highlighted by the CBC.
Additionally, core inflation, which excludes energy and food prices, is expected to decline to 3.7% in 2023, compared to 5% in 2022. In 2024 and 2025, it is further projected to decrease to 2.5% and 2.4% respectively. This decrease is mainly due to the anticipated impact of the unified monetary policy in the euro zone.
Regarding unemployment, the CBC has revised its 2023 and 2024 projections downwards. The unemployment rate is now estimated to be 6.3% in 2023 and 5.9% in 2024, a decrease of 0.4% and 0.2% respectively from the June predictions.
This downward revision for the unemployment rate during 2023-24, despite a downward revision of the GDP, reflects a greater-than-expected decline in unemployment rates observed in the second quarter of the year. This happened despite the impact of sanctions in the professional services sector, as noted by the CBC.
However, the CBC emphasizes the ongoing resilience observed in the labor market despite the impact of the continuing conflict in Ukraine. This resilience is evident from the drop in unemployment rates to 5.9% in the second quarter, compared to 6.8% in the first quarter of 2023.
"For the years 2024-25, a continued declining trend is anticipated, in line with the expected GDP growth. The unemployment rate is projected to be 5.9% in 2024 and 5.6% in 2025, approaching conditions of full employment," states the CBC.