Real GDP growth for 2014 is projected at -3.4%. During the first quarter of 2014 real GDP is estimated to contract by 4.0%; in the second and third quarter real activity is forecasted to also decline by 2.7% and 3.2%, respectively.

In the final quarter of 2014 recession is projected to accelerate compared to the previous two quarters as real GDP growth is estimated at -3.8%.

The projections suggest a milder contraction in real GDP for 2014 compared to the -4.8% forecasted in the economic adjustment programme. Nevertheless, the econometric analysis based on the currently available data suggests that the recession is likely to persist in 2015, indicating that the adjustment of the economy may take longer to complete.

The forecasted moderation of the recession in 2014 is driven by the slowdown in output contraction in Cyprus and the improvement of external real economy conditions in the final quarter of 2013.

Domestic leading indicators associated with the real economy continued to improve over the first months of 2014, resulting in less negative forecasts compared to those reported inthe previous issue of the bulletin.

Other recent developments in the economy that have contributed to more favourable projections include the strengthening of economic confidence in Cyprus and the euro area, the improved performance of international stock markets and the recovery of the Cyprus stock exchange index, the reduction in some domestic lending interest rates and the decline in the spreads of European periphery countries, mainly that of Greece. The slowdown of the deposit contraction in the final quarter of 2013 and on going deleveraging also appear to play a role in shaping the current projections for 2014.

The forecasts, however, are accompanied by considerable downside risks, most notably those related to the stabilisation process of the financial system in conditions of declining output, high unemployment and large private and public debt burdens.

Other downside risks relate to the possible escalation of the crisis in Ukraine followed by new EU sanctions on Russia and delays in the advancement of agreed structural reforms that could damage consumer, business and investor confidence and create risks to fiscal targets and economic activity.

Upside risks to the outlook are mainly linked to investment decisions associated with energy and tourism sectors, and stronger growth in the United Kingdom and the euro area.

Source: Famagusta Gazette