The European Commission's spring forecasts, released yesterday, indicate that after a strong recovery of 5.5% in 2021, economic activity is expected to slow to 2.3% in 2022, due to the negative impact of Russia's invasion of Ukraine and a substantial increase in inflation.
They report indicatively that real GDP grew by 5.5% in 2021, surpassing pre-pandemic levels in 2019, where both domestic and external demand contributed to this growth. Domestic demand was supported by both expansionary fiscal policy and the successful vaccination campaign, which allowed for the gradual lifting of restrictions. It is worth noting that the European Commission makes special mention of the very strong growth in exports of non-tourism related services, such as High Technology and professional services, which demonstrates the continued diversification of our growth model and the success of our High Technology business attraction policies.
Regarding 2022, the Spring Forecast states that the Cypriot economy started from a strong base, but the invasion of Ukraine and the related sanctions that have been imposed are expected High fuel prices and rising inflation pose an additional challenge to the tourism sector. Overall, real GDP is projected to grow by 2.3% in 2022, marginally lower than the Eurozone average growth rate.
Inflation for 2022 is expected at 5.2% due to rising energy prices but significantly lower than the EU and Eurozone average inflation rates of 6.8% and 6.1% respectively. Specifically for this year Cyprus is estimated to have the 6th lowest inflation in the EU. The increase in workers' per capita earnings for this year is estimated to reach 4.1% which is higher than the Eurozone average (3.4%) but lower than inflation. For 2023, inflation is expected to fall further to 2.7%, while growth in per capita compensation of employees is expected to reach 4.5%, well above inflation.
Stronger growth momentum is projected for 2023, with GDP growth of 3.5%, significantly higher than the EU average.EU and euro area estimated at 2.3%, due to the recovery of the tourism sector, and wage support from the partial indexation applied in Cyprus as opposed to most EU countries, which will support purchasing power. In addition, the implementation of the Cyprus Recovery and Resilience Plan is expected to further support investment.
The European Commission's GDP forecasts for 2022 and 2023, in a period of great uncertainty and challenges, are generally in line with the latest forecasts of the Ministry of Finance, which predict growth of 2.7% and 3.8%, and demonstrate once again the resilience of the Cypriot economy in times of crisis.
(MB/SX)
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