The European Commission revised upwards its growth projection for the Cypriot economy in its Spring Economic Forecast, which was released on May 15th. Cyprus’ GDP growth forecast is set higher for both 2023 and 2024.

More specifically, the Cypriot economy is expected to slow down from 5.6% in 2022 to 2.3% in 2023 and 2.7% in 2024. According to the Commission's winter forecast, growth was expected to reach 1.6% in 2023 and 2.1% in 2024.

As the Commission notes, the economy is set to be dampened by continued high inflation, which erodes the purchasing power of households, by higher interest rates that negatively affect investment, and by Cyprus’ trading partners’ weakening growth momentum, which affects external demand.

The partial indexation of wages (ATA) implemented in January 2023 is expected to somewhat cushion the negative impact on consumption. The implementation of the National Recovery and Resilience Plan is expected to support investment, notably in construction, meanwhile tourism and other export-oriented industries are projected to keep growing, although at a slower pace.

Cyprus is among the top ten EU countries with the highest growth rate in 2023 and 2024, whereas the EU average is forecast at 1% and 1.7% in 2023 and 2024, respectively. 

The labor market is improving due to decreasing unemployment rate, specifically 6.8% in 2022, down from 7.5% in 2021. It is forecast to slightly increase to 6.9% in 2023, in line with the GDP growth slowdown, but it is expected to decrease again to 6.4% in 2024, as labor-intensive industries are set to continue expanding.

Inflation reached its peak in 2022 (8.1%) due to soaring global commodity prices. As global energy prices are toning down and supply chain disruptions are phasing out, inflation is expected to abate to 3.8% rate in 2023. However, the partial indexation of wages (ATA) is set to cause some secondary upward effects. The expected balance of global energy and other commodity prices is projected to reduce inflation further to 2.5% in 2024.

Cyprus’ state budget is set to record a surplus of 1.8% of the GDP in 2023, the European Commission projects. Public revenue is supported by the continued strong performance of private consumption, growth of corporate earnings, and wage increases. Meanwhile, increases in wages and pensions of the public sector are projected to put pressure on government expenditure. The forecast assumes that the measures to mitigate the economic and social impact of high prices on households’ energy bills -amounting to 0.4% of GDP in 2023, compared to 0.7% in 2022- will be fully phased out at the end of June 2023.

Cyprus’ budget in 2023 will also be affected by the assumed complete phasing out of COVID-19 emergency measures, which are estimated to have amounted to 0.3% of GDP in 2022. For 2024, the budget surplus is expected to reach approximately 2.1% of GDP.

In addition, the debt-to-GDP ratio is forecast to decrease over the next few years based on projected nominal GDP growth and primary surpluses. It is set to reach 80.4% by the end of 2023 and further decline to 72.5% in 2024, down from 86.5% in 2022.