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EU Says Cyprus Growth to Remain Robust

Cyprus experienced a record-high tourism season. Cyprus experienced a record-high tourism season.

Cyprus is experiencing a solid economic recovery and growth is expected to remain robust, although it looks set to slow slightly, the European Commission forecasted on Monday.

Inflation is projected to turn moderately positive this year and the labor market is expected to perform strongly, CNA reported.

Banks remain burdened by non-performing loans, despite the ongoing deleveraging efforts. The general government position is expected to remain broadly balanced. 

Specifically, the European Commission forecasts growth of 2.8% in 2016, 2.5% in 2017 and 2.3% in 2018. Employment grew by 2.7% in 2016, will grow by 2.2% in 2017 and an additional 1.8% in 2018 with unemployment declining from 13.3% in 2016 to 12% in 2017 and 11% in 2018. 

Similarly, the debt will be below 100% in 2018 for the first time (namely 99.6%) after dropping at 103.2% in 2017. For 2016 it stood at 107.4%. 

Finally, the budget of 2016 will be balanced (zero deficit), of 2017 will show a deficit of -0.2% and that of 2018 and 2019 a surplus of 0.4%. The structural deficit is projected at -0.7% in 2017 and 0.9% in 2018, the cyclically adjusted deficit has the exact same figures, the EU report said. 

Finally inflation will float around 1.2% in 2017 and 1.1% in 2018 from 1.2% in 2016.

Private consumption led real GDP growth, supported by declining consumer prices, increasing employment and rising disposable income. 

Net exports also contributed positively to growth. Service exports were particularly strong, as Cyprus experienced a record-high tourism season, benefitting from geopolitical tensions in competing destinations and successful efforts to extend the tourist season. 

Meanwhile, imports grew less than expected, with a contraction of imported services recorded in the third quarter of 2016. With the turn of the economic cycle, accumulated inventories started being used up in 2016, resulting in a negative contribution to real GDP. Investment was volatile, influenced by acquisitions in shipping equipment.

A stabilizing real estate market, together with increased foreign direct investment, is likely to provide some lift for investment. However, as banks are burdened with a very high share of non- performing loans, credit remains scarce. Thus, corporates are expected to continue to use their internal resources to finance investment. 

Similarly, households are expected to continue using accumulated wealth to fund part of their expenditure and the household saving rate is expected to remain negative over the forecast horizon.

 

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