The Cyprus economy will shrink by 7.4% in 2020, public finances will record a -7.0% deficit, domestic demand is expected to fall moderately and exports of services will plummet, according to the European Commission Spring Economic Forecast.
The forecasts were published today in Brussels by DGECFIN and presented by EU Commissioner for the economy Paoli Gentiloni to the Press.
According to the forecast, Cyprus is set for a -7,4% contraction of the GDP in 2020, followed by 6.1% growth in 2021.
The deficit will increase to -7.0% in 2020 and -1.8% in 2021. Debt to GDP ratio will increase to 115.7% and 105.0% respectively in the two years, inflation at -0.2% and 1.0% and unemployment at 8.6% and 7.5% for 2020 and 2021.
According to the official text:
“Cyprus’ economic activity is heading into a severe contraction in 2020 due to the global outbreak of COVID-19 and the confinement measures that followed”
The European Commission states that “external demand for services is set to dip significantly, with tourism expected to be particularly hard hit by the crisis. Domestic demand is also forecast to contract significantly due to the restrictions to consumption and construction activity as well as a drop in confidence.”
“The general government budget is expected to record a large deficit and public debt is set to increase as a result before declining again in 2021”, says the EC and notes that “Cyprus’ recovery from the deep financial and economic crisis of 2013 has been remarkable. By 2017, real GDP had risen above its pre-crisis level. In 2019, economic activity grew by 3.2%.”
“However, the COVID-19 crisis is set to push the economy into a severe recession in 2020, with real GDP forecast to contract by 71⁄2 in 2020 before bouncing back with growth of around 6% in 2021”
“The impact of the outbreak and subsequent health- policy responses on economic activity is expected to be significant in the second quarter as the outbreak in the country and the lockdown started in mid-March.”
“The economy is expected to start a slow recovery towards the end of the second quarter. However, the impact of the crisis on the tourism sector is likely to last longer”.
The EC states that “the COVID-19 pandemic is expected to significantly dampen demand for tourism. Cyprus is heavily dependent on tourism, as every year the country hosts around 4 million tourists (4.5 times more than its population) and the sector accounts for more than 20% of GDP expected to evolve in line with final demand, resulting in a contraction in 2020 and a rebound in 2021. The contribution of net exports to GDP growth is set to be significantly negative in 2020, but to turn positive in 2021”.
Private consumption “is set to fall sharply during the lockdown period and to gradually recover in the second half of the year”.
Private consumption “is expected to fall more than real disposable income, leading to a surge of savings in 2020, which should normalise in 2021.”
The unemployment rate “is projected to increase, albeit modestly. The fiscal measures adopted are expected to support employment and households’ incomes”.
Investment in construction “could rebound quickly after the lockdown owing to the pipeline of large and already commenced multi-year projects”.
Public consumption “is the only component of domestic demand that is expected to continue growing in 2020, reflecting the fiscal stimulus measures adopted, increases in the public payroll, and expenditures linked to the national health system”.
The EC warns that “downside risks are significant. In addition to the uncertainty surrounding the pandemic and the economic recovery after the lifting of the lockdown measures, the large private and public sector debt overhang increases further downside risks related to a prolonged economic downturn.”
“Moreover, as a small open economy, Cyprus is exposed to external risks related to the economic impact of the pandemic on its main trading partners i.e. the EU, the UK and Russia”, the EC notes.
Headline inflation “is forecast to fall from 0.5% in 2019 to -0.2% in 2020, driven by lower energy prices and non-energy industrial goods.”
Headline inflation “is expected to turn positive again in 2021, at 1%, reflecting increasing food and services prices. This is set to lead to a moderate increase in core inflation.”
The general government balance “is forecast to dive into a deficit of 7% of GDP in 2020 after a sizeable surplus of 13⁄4% of GDP in 2019.”
Cyprus’ fiscal performance in 2020 “is projected to be severely affected by falling revenues due to the economic downturn and measures to dampen the social and economic effects of the COVID-19 crisis.”
According to the EC, in 2021, public finances should improve, with the general government deficit narrowing to 13⁄4% of GDP, based on the assumption that the measures adopted to fight the pandemic will only have a temporary effect in 2020.
“The public debt- to-GDP ratio is set to rise to over 1151⁄2% in 2020 from 951⁄2% in 2019, before decreasing to 105% in 2021”, the EC notes.
Expenditure growth “is projected to surge by 171⁄2% in 2020 and to decrease by 11⁄2% in 2021”.
“Spending measures adopted to fight the pandemic (4.3% of GDP), which include wage subsidies, income support for the self-employed, and additional spending to strengthen the healthcare system, are expected to have a temporary effect on public finances in 2020”, the EC notes.
However, the Commission warns that “higher compensation of public employees and the cost of the roll-out of the second phase of National Health Insurance System (NHIS) are projected to increase public expenditure in 2020 and 2021”.
“The projected decrease in revenue in 2020 (-3%) primarily reflects the large expected decrease in tax revenues (-10%).”
“Revenue is expected to pick up in 2021 on account of the projected economic recovery”, the EC notes.
Looking forward, “the potential realisation of contingent liabilities is a risk to Cyprus’ public finances”. “They concern in particular the asset protection schemes to Hellenic Bank, as well as the potential deficit of public healthcare providers during the first years of the NHIS”, the EC concludes.