However, it added that interconnections with economies both within and outside the EU pose significant geopolitical and trade tension risks, according to an overview of macroeconomic imbalances. The commission issued in-depth reviews (IDRs) assessing macroeconomic imbalances for six member states, Cyprus, the Netherlands, Romania, Slovakia, Spain, and Sweden, with reports for six more member states expected to follow. The overview provided in the introduction of the Cyprus report provides an analysis of the country’s vulnerabilities related to high private, public, and external debt, as well as potential new emerging risks.

This year’s report evaluates the persistence or elimination of identified vulnerabilities from previous years, potential emerging risks, progress in policy implementation, and options for future policy considerations. Countries were selected under the surveillance mechanism, based on specific economic indicators determining which member states require identification and analysis of potential risks. Particularly, the Alert Mechanism Report (AMR) for 2024, adopted in November 2023 as part of the Autumn Package, identified 12 member states for which IDRs were deemed necessary. The other six countries for which reports will be published in the coming weeks are France, Germany, Greece, Hungary, Italy, and Portugal. The reports are published this year before the spring package to allow comprehensive discussions before the commission presents its country-specific recommendations within the framework of the coordination and monitoring of economic and social policies in the EU economies, known as the European Semester.

The introduction of the Cyprus report highlights that stable economic growth, coupled with declining inflation, both contribute toward establishing a strong foundation for the Cypriot economy. The GDP growth rate moderated to 2.4 per cent in 2023, down from 5.1 per cent in 2022, with the slowdown primarily attributed to weaker external demand for financial and business services, influenced by Russia’s invasion of Ukraine.

According to recent interim winter forecasts by the European Commission, economic growth is expected to rebound again in 2024 and 2025, reaching approximately 3 per cent. This acceleration in growth is expected to be supported by significant planned investments in energy, education, healthcare, and tourism, partly supported by the National Recovery and Resilience Plan.

General inflation began to decline in 2023, falling to 3.9 per cent, while core inflation is slightly higher at 4.4 per cent, from 8.1 per cent and 5.3 per cent respectively in 2022. Moreover, inflation is expected to continue to decrease in 2024 and 2025. The report also noted that the Cypriot labour market remains robust, with employment continuing to rise and unemployment expected to fall below 6 per cent by 2025, the lowest level in the last decade. At the same time, real wages are projected to experience moderate growth during 2024-2025, as they did in 2023, after significant declines in 2022. The commission’s report on Cyprus also noted that the country’s fiscal position remains strong, with a significant surplus in 2023, which is expected to be maintained in 2024 and 2025. It added that risks to economic prospects are generally balanced.

What is more, the report explained that Cyprus’ high degree of integration with both EU and non-EU economies makes it susceptible to secondary effects arising from economic developments in these economies. It highlighted that the Cypriot economy heavily depends on Greek and Italian products and services, while Greece and the United Kingdom are also major export partners.

Regarding external demand, the report noted that the majority of the Cypriot economy’s total value added is contributed to meeting domestic demand in Germany, the USA, and China. Meanwhile, Cypriot domestic demand is mainly met by the value added produced in the United Kingdom, Greece, and Germany.

The report concluded by saying that due to Cyprus’ high exposure, both directly and indirectly, to partners outside the EU, geopolitical and trade tensions pose a non-negligible risk to its economy.

Source: Cyprus Mail