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European Commission forecasts on Cyprus economy
2003-10-29 12:25:53

By Nicos Bellos

Brussels, Oct 29 (CNA) - The European Commission's economic forecast for 2003 predicts a modest real GDP growth of 2% in Cyprus, pushed by domestic demand and for 2004 a rebound to 3.4% is expected, increasing in strength in 2005.

The position is outlined in the Commission's Autumn Economic Forecasts 2003-2005 for the euro area, the EU and the Acceding and Candidate countries released here Wednesday.

According to the report, the "economy in Cyprus in 2002, due to low EU growth and international tension, tourist arrivals fell steeply" but "Cyprus still managed GDP growth of 2% that year, supported by moderate domestic demand".

At the same time, it said, "fiscal policy slipped, turning more expansionary" and consumption growth remained modest at 2.5% in line with moderate wage growth and weak consumer confidence". Investment increased by 10% while exports dropped by more than 5% mostly due to a sharp decrease in tourist arrivals of 10%.

Regarding prospects for "2003, the forecast projects modest real GDP growth of 2%, pushed by domestic demand" and "for 2004 a rebound to 3.4% is expected, increasing in strength in 2005 as external demand picks up while domestic private demand remains the driving force".

The economy "has shown some resilience in the face of a difficult international environment" and "economic imbalances have increased, but prospects are for a slow return to more sustainable levels", the Commission report said.

As far as costs and prices are concerned, prices in 2002 and 2003 "were mainly pushed by higher VAT taxation related to the EU accession and inflation reached 2.8% in 2002, eased at 2.4% in August but "for the year, inflation is expected to peak at 4.3% but then to fall back to 2% for the remaining forecast period", it added.

Private consumption growth for 2003 "is expected to remain below 3% subsequently picking up as consumer confidence restores". For this year, "investment is foreseen to decline by 4.5%".

In the first half of 2003, the decline in tourist arrivals, linked with the war in Iraq and SARS continued. "Tourism arrivals now look to decrease by 5% and revive gradually in 2004-2005", the report noted.

Important growth remains almost nil in 2003 as domestic demand growth slows down, but it is foreseen to pick up in line with the resumption in effort and domestic demand expansion but curbed by ad hoc factors such as a fall in defence equipment imports".

"The current account deficit is therefore projected downward from a deficit of 5.3% of GDP in 2002 to 2.8% by 2005", the report added.

Furthermore, it said with "unemployment rates at 3.5-3.9% Cyprus does not have an unemployment problem" as the labour market is relatively flexible while imported seasonal labour also takes some of the strain in some labour market segments".

In addition, the fiscal consolidation programme slipped as the deficit climbed to 3.5% of GDP in 2002. The programme was abandoned in 2003 due to the economic slowdown, increased defence outlays and expansionary measures introduced to offset subdued external demand".

For 2003, "the deficit is now projected to sharply rise to 5.2% of GDP", noting that to "counter this slippage, the government adopted a new consolidation programme. The forecast sets for a gradually declining-but still relatively high-deficit of 2.9% by 2005%", the report concluded.

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