After falling by an estimated 7.4% in 2013, Cyprus’ GDP is forecast to shrink by a further 8% in 2014 and 2.7% in 2015, against a backdrop of shattered consumer and investor confidence, soaring unemployment, and a credit crunch, according to the recently published EY report. EY predicted that the economy was not expected to return to growth before 2017, at which stage economic activity would be 20% lower than the pre-crisis peak. Unemployment, the forecast said, was expected to rise to 25%. Meanwhile, soaring unemployment could undermine fiscal consolidation efforts by cutting tax revenues and forcing up social transfers.

“The outlook for investment is even bleaker. Inevitably, much of the fiscal consolidation efforts have fallen on public investment, but private investment is also plunging in response to the near-meltdown of the banking sector in March 2013,” EY said. With deposits continuing to decline and non-performing loans at very high levels, it will be some time before conditions in the financial sector stabilise and the remaining capital controls can be lifted, the forecast said. “Until conditions improve, banks will have very little appetite to lend new money to any but the very safest companies," said EY. In addition, the economy and financial system would be completely destabilised if Greece abandoned its efforts to remain in the eurozone.

However, a glimmer of hope is offered by the country’s gas reserves, which are expected to boost investment and exports in the long term. Preliminary reports place the gross value of these reserves at US$50 b, (€36.5 b) approximately three times Cyprus’ GDP. The predictions and analyses presented in the EY Eurozone Forecast are based on the European Central Bank’s model of the eurozone economy.

Source: Cyprus Mail