Meanwhile real GDP is estimated to contract by 4.9% in the first and second quarter. “Recession is forecasted to deepen during the second half of 2014, as the stabilisation trends which have been recorded during the last months of 2013 are not strong enough and uniform across all aspects of the economy. GDP growth for the third and fourth quarter of 2014 is projected at -6.1% and -5.5%, respectively,” the ERC’s Economic Outlook for January said.

Downside risks prevail at present, the report said, as the restructuring of systemic financial institutions is underway and the confidence in the banking sector is still fragile. Furthermore, downside risks are reinforced by the high levels of private sector indebtedness amidst unfavourable labour market conditions and declining incomes. Overall, the projections indicate a contraction in real GDP of about 11% for the period 2013-2014 compared to 12.5% forecasted in the economic adjustment programme for Cyprus. However, the econometric models used and the available data currently do not exclude the possibility of continuation of the recession in 2015.

The forecasts in this bulletin remain consistent with evidence, provided in the July and October issues, of a milder recession in 2013 than that projected in the Cyprus programme. Nevertheless, the forecast for 2014 appears less pessimistic than previously. This strengthens the argument for a prolonged recession, as a considerable part of the adjustment costs may incur not only in 2014 but, possibly, continue in subsequent years.

The UCy outlook added that downside risks that could lead to a worse outcome than that forecasted relate to the following:
- The prolonged tight financial conditions marked by limited liquidity and credit, and relatively high interest rates could have long-lasting effects on investment, employment and growth; and could result in higher than anticipated rates of non-performing loans.
- Failure to handle effectively the relaxation of transaction restrictions and large problematic loans could undermine the fragile confidence in the banking sector.
- Additional fiscal consolidation measures (e.g. reduction in social transfers, allowances, public sector payroll and/or increase in taxes) required for the achievement of fiscal targets in subsequent quarters, will impact negatively on disposable income and demand.
- Deterioration in external environment (e.g. in Russia or Europe) could negatively affect activity in Cyprus through weakening foreign demand.

Nevertheless, if the current patterns of stabilisation/improvement in various macroeconomic indicators continue, the downturn (especially in the second half of 2014) could be milder. The report said that upside factors include investment decisions related to the hydrocarbon exploitation process, while the tourism industry will strengthen economic confidence and, thereby, improve growth prospects. Also, the effective absorption of European funds could alleviate to some extent the contractionary effects through increased employment and economic activity, while the liberalisation of flights between Russia and Cyprus is expected to boost tourist arrivals further and ease the seasonality of the Cypriot tourist product, with beneficial effects on activity and employment. Stronger growth in the U.K. is conducive to an improved export performance in Cyprus. CPI inflation is expected to remain subdued because of the recessionary conditions and the absence of significant upward pressures on oil prices. CPI inflation in 2014 is projected at 0.7%.

Source: Financial Mirror