News Local EC sees GDP shrinking by 7.75% as pandemic takes toll on tourism

EC sees GDP shrinking by 7.75% as pandemic takes toll on tourism

 

The severe impact of coronavirus on Cyprus’ tourism sector spells trouble for the economy with real GDP expected to contract by 7¾% in 2020 and to partially recover in 2021 by 5¼%, the European Commission said on Tuesday.

Even if the expected gradual recovery begins in July, revenues from tourism could hover around 25% of last year’s level, it noted,

This forecast in line with the EC’s projections for the EU which it said will experience a deep recession this year due to the coronavirus pandemic, despite the swift and comprehensive policy response at both EU and national levels.

In its summer 2020 economic forecasts, the European Commission said that because the lifting of lockdown measures is proceeding at a more gradual pace than assumed in its Spring Forecast, the impact on economic activity in 2020 will be more significant than anticipated.

The Summer 2020 Economic Forecast projects that the euro area economy will contract by 8.7% in 2020 and grow by 6.1% in 2021. The EU economy is forecast to contract by 8.3% in 2020 and grow by 5.8% in 2021. The contraction in 2020 is, therefore, projected to be significantly greater than the 7.7% projected for the euro area and 7.4% for the EU as a whole in the Spring Forecast. Growth in 2021 will also be slightly less robust than projected in the spring.

As regards Cyprus, the forecast notes that the country was on a solid growth path before the global outbreak of COVID-19 but the pandemic and the confinement measures that followed have dramatically changed the picture.

In the first quarter of 2020, economic growth slowed down considerably, 0.8% (year-on-year), reflecting a significant fall in external demand for goods and tourism. Economic sentiment and expectations in services are at a historic low, despite a slight improvement in June. Real GDP is forecast to contract by 7¾% in 2020 and to partially recover in 2021 by 5¼%.

Private consumption and investment, notably in equipment, are expected to decline substantially. The stimulus measures adopted are expected to support employment and household incomes and help businesses to continue investing and maintaining their capacity, thus somewhat mitigating the severe impact on domestic demand.

This is also reflected in a robust increase in public consumption. The contribution of net exports to GDP growth is set to be significantly negative in 2020 and to turn positive in 2021, albeit not recovering fully to its pre-pandemic levels. Downside risks to the outlook are significant

Tourism, the main pillar of Cyprus’ economy, has been severely affected. The COVID-19 pandemic is expected to significantly dampen international demand for tourism.

Tourist arrivals and revenues decreased by 46.5% and 52.4%, respectively in the first quarter of 2020 (year-on-year).

The travel restrictions in place throughout the second quarter, had a severe impact on the sector. Even if the expected gradual recovery begins in July, revenues from tourism could hover around 25% of last year’s level.

Further prolongation of the travel restrictions from the UK and Russia – Cyprus’ main tourist markets – could have a strong negative effect. Furthermore, the sharp increase in unemployment in services linked to tourism and the increased risk of bankruptcies does not bode well for the recovery in 2021.

Headline inflation is forecast to fall from 0.5% in 2019 to -0.5% in 2020, driven by lower prices for energy, processed food and services. Headline inflation is expected to turn positive again in 2021, at 0.8%, reflecting the recovery of energy prices and services. Core inflation is expected to fall by 0.2% in 2020 and to edge up moderately in 2021.

 

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