EXPOSURE of the financial sector to Greece, the Mari munitions blast of last July, low consumer confidence and the ongoing recession in the eurozone are the key reasons why Cyprus’ economy is set to shrink this year, the European Commission said in its latest interim forecast published yesterday.
The island’s GDP is projected to contract by 0.5 per cent in 2012 due to weak domestic demand. The Commission’s downward revision for Cyprus relative to the autumn 2011 forecast was due to the worsening of the external environment and by the adoption of additional consolidation measures which were not accounted for in the previous forecast.
In addition, the Commission said, “the deterioration in financial markets and the tightening of credit conditions may raise the cost of financing to the private sector and limit access to it.”
The housing sector would remain languid, although construction investment was likely to benefit from reconstruction work in the destroyed Vassilikos power station and from other infrastructure projects.
The good news was that “consumer and business confidence should begin to rebound during the second half of the year, with the improvement of the external environment, the start of the tourist season and the resumption of investment projects as uncertainty dissipates.”
The Commission said HICP inflation in Cyprus was projected to decline to 2.8 per cent in 2012 from 3.5 per cent in 2011, due to a combination of easing commodity prices and weakening domestic demand, while the effect of increased electricity prices was set to “dissipate in the last quarter of the year.”
On the upside, external demand may strengthen more than expected if the announced strategic plans by the government for attracting more tourists and foreign investors succeed – for example plans for the introduction of new destinations, for tourist traffic growth, and incentives schemes for winter tourism.
On the downside, greater spillovers from potential worsening conditions in Greece, due to the large exposure of the financial sector, are substantial, the Commission said.
The Commission forecast a mild recession in the eurozone, with real GDP shrinking by 0.3 per cent, but said modest growth would likely return in the second half of the year.
Cyprus was one of nine countries where GDP growth was forecast to be negative, along with Belgium, Greece, Spain, Italy, Hungary, the Netherlands, Portugal and Slovenia. The economy was expected to grow in 17 countries — Bulgaria, Denmark, Germany, Estonia, Ireland, France, Latvia, Lithuania, Luxembourg, Malta, Austria, Poland, Romania, Slovakia, Finland, Sweden and the United Kingdom.
