Central Bank slashes 2012 growth forecast to zero

THE Central Bank yesterday slashed its growth forecast for the island’s economy next year to zero, saying fiscal consolidation and possible deleveraging by banks exposed to Greece would dampen economic activity.

The island should see a return to modest growth of 1.3 per cent in 2013, the Central Bank said in a bi-annual macroeconomic survey.

The bank forecasts 0.3 per cent growth this year and had previously forecast the economy would grow 2.1 per cent in 2012.

It said a blast which destroyed the island’s largest power station in July curtailed business activity, with sentiment further dampened by the debt crisis in the eurozone and a tapering in of investment activity.

The finance ministry expects growth of 0.2 per cent next year, whereas the IMF expects a 1.0 per cent contraction in the €17.5-billion economy, the eurozone’s third smallest.

The Central Bank said fiscal consolidation would hurt growth next year as would possible deleveraging efforts by Cypriot banks exposed to debt-laden Greece.

Core inflation, which excludes volatile energy prices, was likely to ease on average next year to 1.7 per cent, after accelerating “significantly” this year to 1.8 per cent from 0.5 per cent in 2010, the Central Bank said.

Cyprus’ fiscal deficit is expected to reach 6.0 per cent of GDP this year and the European Union has warned it could face financial penalties if it does not get the deficit below 3.0 per cent of GDP in 2012.

Cypriot banks need to raise €3.5 billion to reach a core tier 1 ratio of 9.0 per cent by June 2012, the European Banking Authority said on Thursday in an EU-wide survey of banks. 

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