THE Cyprus economy remains strong and set for further growth in 2007 and 2008, boosting the island’s chances for euro zone approval from EU finance ministers next week.
The forecast shows that Cyprus and Malta, who both hope to adopt the euro on January 1 next year, meet the key euro entry criteria now, according to the EU’s Spring Economic forecast, released yesterday.
GDP in Cyprus is projected to continue growing solidly at 3.8 per cent in 2007 and 3.9 per cent in 2008, driven by domestic demand.
The report forecasts increasing disposable income, supported by sustained wage and employment growth, and an expansion of investment mainly by non-residents in the housing market.
The report also predicts a number of effects resulting from the confidence that euro zone entry would inspire. EU Finance Ministers are to decide on May 16 whether Cyprus fulfills the economic criteria to adopt the euro from January 1.
However, the report does not factor in the budget of VAT increases in foodstuffs, pharmaceuticals and restaurants from next year, which are required to comply with the EU acquis, “since their precise timing and implementation modalities are not yet known”.
Due to oil price base effects and the reduction in car excises enacted in October 2006, overall harmonised inflation is expected to moderate to 1.3 per cent in 2007 before picking up to 2 per cent in 2008.
The EU also forecasts that employment will continue growing at the rate of around 1.5 per cent until 2008
“Higher participation by foreign workers, combined with moderate wage growth in the public sector, should also keep wage pressures relatively contained, in spite of tight labour market conditions,” said the report.
It predicts that since productivity is set to rise just above 2.5 per cent by 2008, labour costs will rise, but at lower rates than in the recent past.
Economic activity in 2006 remained strong. “Although slightly decelerating compared with last year, private consumption remained strong supported by historically low interest rates and sustained credit expansion, as well as by continued employment and wage growth,” said the report.
However, exports of goods fell substantially in comparison with the past two years. “Export-oriented services have benefited from the positive outlook in the main export markets, while revenue growth from tourism decelerated,” it said, adding that total exports were estimated to have grown by just above 2 per cent in real terms, at the same rate estimated for total imports.
In the bloc as a whole, the EU economy is expected to grow by 2.9 per cent in 2007 and 2.7 per cent in 2008, and 2.6 per cent and 2.5 per cent respectively in the euro area, on the back of solid investment and stronger private consumption, according to the Commission.
“The European Union and the euro area remain on a brisk growth path that should reduce the unemployment rate and the average public deficit further to levels not seen in a long time,” said Joaqu?n Almunia, the Economic and Monetary Affairs Commissioner.
“We must help sustain the economic recovery by putting public finances firmly on a sounder footing and by pursuing the reform process. This, in turn, will cut public debts and help increase the growth potential before the ageing problem starts kicking in”
