Cyprus Economic Forecast

A second release confirmed that annual economic growth eased in Q2. Public spending and private consumption growth slowed. Moreover, fixed investment swung into contraction on the back of sharp declines in machinery and transport investment, likely due to higher interest rates. On the flip side, exports fell at a softer rate. Available data for Q3 paints a dual picture: Domestic demand likely strengthened thanks to declining inflation in July–August. That said, the external sector should have lost traction, as tourist arrivals grew at a slower annual rate in July–August relative to Q2, while merchandise exports plummeted in July. In other news, in early September, S&P Global Ratings affirmed the country’s rating at ‘BBB’ but revised the outlook to positive thanks to a reduction in non-performing loans and the prospect of fiscal surpluses in the coming years.

Harmonized inflation rose to 3.1% in August from July’s 2.4%. The acceleration was driven by smaller declines in prices for housing and utilities, as well as transportation. Inflation will average lower in 2023 relative to last year due to higher interest rates, lower commodity prices and VAT cuts. Spikes in oil prices pose an upside risk.