Cyprus Forecasts Robust Economic Growth for 2023 Despite Global Uncertainties

Cyprus is poised to maintain strong economic growth in 2023, even in the face of global uncertainties, according to an analysis by Eurobank Research Economist Michail Vassileiadis. The report highlighted key factors contributing to the nation's economic expansion and also raised concerns about potential challenges.

Vassileiadis acknowledged the impressive growth of Cyprus's economy in 2021, which reached 6.6 percent. Despite a slight slowdown in 2022 to 5.6 percent, partly attributed to the conflict in Ukraine, the country's economy remained resilient.

Factors contributing to this growth included a resurgent tourism sector, robust export of services (with an 11.6 percent increase), and significant growth in household consumption (7.8 percent). The absence of COVID-19 restrictions in 2022 played a role in supporting household consumption, leading to strong employment rates and a 12-year low average unemployment rate of 6.8 percent.

"The strong economic growth in Cyprus in recent years has been bolstered by factors such as robust tourism and resilient household consumption," said Michail Vassileiadis. "These have played a vital role in cushioning the economy against global uncertainties."

However, the analysis noted that the impressive growth rate of 2022 moderated in the fourth quarter, with Gross Domestic Product (GDP) growing at 4.4 percent annually. Further deceleration is expected in the first and second quarters of 2023, with GDP growth projected at 3.4 percent and 2.3 percent, respectively.

Vassileiadis also highlighted the potential impact of the external balance on the economy. Exports, especially of services, increased by 2.3 percent, a significant decline compared to the 21.2 percent increase in 2022. Meanwhile, imports expanded, albeit at a slower rate than the previous year (7.3 percent compared to 24.5 percent), primarily due to increased imports of goods related to maritime investments.

The economist emphasized the importance of the construction sector, driven in part by the booming tourism and information technology (IT) sectors. These industries, along with residential construction, are expected to contribute to further GDP growth. The IT sector, in particular, has expanded due to government initiatives attracting foreign businesses.

However, rising interest rates, both domestically and internationally, aimed at curbing inflation, have placed pressure on loan demand, impacting the financial sector's growth.

Regarding inflation, Vassileiadis discussed the initial surge in consumer prices in the second quarter of 2022 due to the effects of the conflict in Ukraine, which gradually subsided. As of July 2023, inflation stood at 2.4 percent, down from the peak of 10.6 percent in July 2022. The economist cautioned about potential risks posed by rising global energy prices and the transmission of inflation to wages in Cyprus.

"Cyprus is poised to maintain steady growth in 2023, primarily driven by household consumption, declining inflation, and recovery in the tourism and IT sectors," Vassileiadis stated. "However, vigilance is required to address the challenges posed by global uncertainties and potential inflationary pressures."

By fLEXI tEAM