The Cypriot economy will continue to contract until 2017, according to the December 2013 forecasts issued by the audit firm, E&Y (Ernst & Young), which notes that hope for economic recovery stems from Cyprus’ gas reserves, which are expected to boost investment and exports in the long term.
In its projections, compiled in cooperation with Oxford Economics, E&Y estimates that following a contraction of 7.4% in 2013 the Cypriot output will continue to decline until 2017. In 2014 the economy will contract by 8.0% followed by a contraction of 2.7% in 2015 and 1.0% in 2016. The economy will return to growth in 2017 with 1.4%.
E&Y`s projections come in contrast with the forecasts of Cyprus` international lenders which project for a contraction of 7.7% and 4.8% in 2013 and 2014 respectively, followed by growth of 1.1% and 1.9% in 2015 and 2016 respectively.
Last March Cyprus averted a collapse of its banking sector after agreeing on a €10 billion bailout with the Troika (EC, ECB and IMF), that featured haircut of banking deposits over €100,000 and an array of public spending cuts and salary reductions.
“A return to growth is not expected until 2017, by which time economic activity will be 20% lower than the pre-crisis peak,” E&Y said, adding that “household income will continue to plunge under the strain of fiscal consolidation measures, including large reductions in public sector payrolls and social transfers, an increase in employees’ pension contributions and further increases in indirect taxes.”
E&Y projects that Cyprus` public debt will reach 121% of GDP will continue on an upward trajectory reaching 200.5% in 2017.
According to E&Y, labour market conditions are expected to worsen considerably next year, with the unemployment rate rising above 24%, before peaking at over 25% in 2015, reflecting the sharp contraction of GDP in our forecast.
Weak economic activity and a hiring freeze in a public sector that is under fiscal consolidation measures have hit unemployment hard, with the effects particularly pronounced in agriculture and construction, the report said.
According to E&Y, in spite of the significant contractionary policy implemented this year, the government deficit is expected to widen this year at 8.4% of GDP, an increase attributed to one-off compensation of retirement funds in a now non-existent bank, which is equivalent to 1.8% of output.
“The fiscal position in 2014 is expected to be determined by the sharp contractions in economic activity and fiscal consolidation efforts,” the report noted.
“Even with such dismal prospects, the downside risks remain considerable”, E&Y said, citing possible further household and corporate defaults, caused by deflation or falling incomes, would exert downward pressure on consumption and investment and create further recapitalization needs for the financial system, whereas soaring unemployment could undermine fiscal consolidation efforts by cutting tax revenues and forcing up social transfers.
However, EY notes that hope for economic recovery stems from Cyprus’s gas reserves, which are expected to boost investment and exports in the long term.
“While the estimates of the appraisal drilling results are less than initially predicted, preliminary reports place the gross value of these reserves at US$50b, approximately three times the country’s GDP. However, this support is some way off; officials have indicated that production will be delayed until 2021,” E&Y said.