In its medium-term macroeconomic forecasts for March 2023, the bank predicts that Cyprus’ GDP will grow by 2.6 per cent this year, up from its December 2022 forecast of 2.5 per cent. It also predicts that the growth rate will rise to 3.0 per cent in 2024 and 3.1 per cent in 2025.

In addition, the small upward revision of 0.1 percentage points in 2023 is partly due to the slightly more positive outlook in the external environment and expected lower energy prices. However, the bank noted that the rates of economic growth in the external environment remain below long-term averages, despite the positive revision. The unemployment rate is estimated to be 6.6 per cent this year, up 0.1 per cent from the December forecast, before falling to 5.9 per cent and 5.5 per cent in 2024 and 2025 respectively.

What is more, the bank attributed the drop in unemployment compared to 2022 to the tightness observed in the labour market and the expected manageable impact of the war in Ukraine, based on available data.

Harmonised inflation this year is estimated to be 3.3 per cent, a 0.1 per cent decrease from December forecasts, according to the bank. Inflation is expected to decelerate further in 2024 to 2.3 per cent and 1.9 per cent in 2025. The small downward revision of 0.1 percentage points in 2023 compared to December 2022 forecasts is mainly due to lower-than-expected energy prices and the extension of government support measures to reduce electricity costs and oil prices, which were largely offset by relatively larger-than-expected upward pressures on industrial goods prices, excluding energy, as well as increases in the prices of some services due to the partial incorporation of wage increases.

Furthermore, the bank explained that the easing of inflation in 2024 and 2025 is attributed to the normalisation of energy and food prices, the expected full correction of supply chain disruptions in 2023, and the expected impact on demand from rising interest rates. The new forecast for core inflation, excluding energy and food prices, is down 0.7 per cent to 3.6 per cent this year and is expected to decline further to 2.5 per cent and 2.3 per cent in 2024 and 2025, respectively.

The Central Bank stated that probabilities of deviation from the baseline forecast scenario tend to be slightly to the downside for GDP and slightly to the upside for inflation in the 2023-2025 period. The bank has also identified the main downside risks to GDP as the possibility of a worse-than-expected outlook for the external environment and larger or more persistent lag effects from higher energy prices in 2022.

However, it noted that there are also upside risks, including higher-than-forecast performance in service exports, particularly due to the continued influx of foreign companies to the island.

Source: Cyprus Mail