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Cyprus to remain in recession until 2017

Against a backdrop of shattered consumer and investor confidence, soaring unemployment, and a credit crunch, the Cypriot economy will remain in recession until 2017.

recessionThe Cypriot economy will remain in recession until 2017, according to a December Eurozone Forecast published by EY (formerly Ernst and Young) in collaboration with Oxford Economics.

“After falling by an estimated 7.4% in 2013, 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.

The economy is not expected to return to growth until 2017, at which stage economic activity will be 20% lower than the pre-crisis peak.”

Household incomes are coming under enormous pressure from the impact of fiscal consolidation efforts, while the repercussions of the crisis in the private sector are likely to result in a sharp increase in unemployment to around 25% of the workforce by 2015. As a result, we expect consumer spending to continue to decline throughout 2013–17.”

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.

With deposits continuing to decline and non-performing loans at very high levels, it will be some time before conditions in the financial sector stabilize and the remaining capital controls can be lifted. Until conditions improve, banks will have very little appetite to lend new money to any but the very safest companies. Firms that do wish to invest their own cash will be unable to do so freely.”

Even with such dismal prospects, the downside risks remain considerable. Further household and corporate defaults would exert downward pressure on consumption and investment and create further capitalization needs for the financial system. Meanwhile, soaring unemployment could undermine fiscal consolidation efforts by cutting tax revenues and forcing up social transfers.”

In addition, the economy and financial system would be completely destabilized 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$50b, approximately three times Cyprus’ GDP.”

Further reading

Eurozone Outlook for Cyprus

Readers' comments

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  • Martyn's says:

    This sadly is what happens when a country has a weak government that switches into Denial, sticks it’s head(s) in the sand and ‘postpones the evil day’ – for nigh on three years.

    Compare the Christofias approach to what happened in Ireland. No denial, total realism, ‘bit several unpalatable bullets’, massive co-operation with Troika and other Lenders, hey, 3 years later they begin to ‘come out of the tunnel’.

    The current Cyprus government inherited a complete Economic shambles of course, and thus the real ‘turnaround’ efforts didn’t even start to get underway until March ’13 onwards, so little wonder it’s going to take – at the very least in my view – another 3-4 years to sort out major fiscal and banking structural faults, fund massive increases in unemployment , reduce very large government borrowings.

    And it would be dangerous indeed to point at this stage to MedGas as a likely ‘Saviour’, firstly the realistic identified quantities of gas are said to be disappointing, the country has no inherent skills in the marine extraction or gas processing areas, nor any identifiable ‘success factors’ that suggest any kind of competitive edge is likely to be developed in the short, or even medium!, term.

    And, the ‘new’ government, apart from saying the ‘right things’, is not showing the kind of tenacious attention to Action that characterised the successful Irish ‘turnaround’. The efforts in Cyprus to raise, long-term, much more from IPT have been so far shambolic, decisions on eradicating luxuries like 13th salaries for government employees have recently been postponed and, amazingly, revenues from ever-dwindling new vehicles sales have recently been substantially reduced. Little progress, if any, seems to have been made towards even part-privatisation of Telecoms, Electricity and Port ‘authorities’ – and of course little if anything has been done to unblock the massive property/developer/bank lending ‘blockages’ that could well take this – and probably the next! – government to properly ‘sort out’.

    There must, somewhere, be one or two ‘reasons to be cheerful’ as we enter the annual Season of Goodwill, but right now I can’t think of any. Sad, oh so Sad!

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