The winter forecasts of the European Commission announced yesterday, indicate that after the growth of 5.1% in 2022, the economic activity in Cyprus slowed down in 2023 while for the years 2024 and 2025, the real GDP is expected to recover.
For the first three quarters of 2023, real GDP growth in Cyprus slowed to 2.5% (annualized) compared to 5.8% for the same period in 2022, mainly due to lower external demand for non-tourism services. However, demand for tourism services continued to recover in 2023, with arrivals increasing by 20.1% compared to the corresponding period in 2022, reaching almost pre-pandemic levels. Private consumption remained strong, supported by real wage increases and continued employment growth, up 1.6% for the reporting period compared to the corresponding period in 2022. For the whole of 2023, economic activity is expected to have grown by 2.4%, slightly higher than in the Autumn 2023 Forecast, following 5.1% in 2022.
For the years 2024 and 2025, real GDP is expected to grow by 2.8% and 3% respectively, slightly higher than the autumn forecasts for both years. As reported, economic sentiment among consumers and businesses improved slightly in January 2024. Domestic demand is expected to continue being the main driver for real GDP growth in 2024 and 2025, as automatic wage indexation for around half of the employees (covered by collective agreements in the public and private sector) holds up their purchasing power. Large investment projects in real estate, healthcare, transport and tourism, partly supported by the Recovery and Resilience Facility, are also set to boost growth. By contrast, the contribution of net exports is expected to remain weak due to the ongoing economic uncertainty in Cyprus’ main trading partners and to the strong import demand induced by investments.
Based on the above, the European Commission revised upwards its forecast for the growth rate of 2024-2025 by 0.2 and 0.1 percentage points (pp) respectively compared to the spring forecasts (to 2 .8% from 2.6% for 2024 and to 3.0% from 2.9% for 2025), which are very close to the forecasts of the Ministry of Finance (2.9% for 2024 and 3.1% for 2025).
Indicatively, it should be mentioned that Cyprus is among the two countries in the Eurozone with the highest growth rate in 2024 and among the five countries in 2025. Also, in relation to the Eurozone and the E.U. the growth rate of Cyprus is higher by about 2.0-1.9 p.m. in 2024, and 1.5-1.3 p.m. in 2025 respectively, which confirms the resilience and flexibility of the Cypriot economy supported by a broad productive base to cope with difficult and ominous challenges
On the inflation front, Harmonized Index of Consumer Prices (HICP) inflation is set to moderate to 2.4% in 2024 and to 2.1% in 2025, in line with an assumed continued expected decline in prices for energy and other commodities. By contrast, wage indexation is expected to exert some upward pressure on HICP inflation excluding energy and food. Compared to autumn, the forecast for HICP inflation is revised down for 2024, but is broadly unchanged for 2025.
