Cyprus will recover in 2021, however the recovery will be slower and weaker than initially expected, according to a forecast published on Monday by the University of Cyprus Economic Research Centre.

This forecast is lower than that of the finance ministry, which has predicted 4.5 per cent growth for this year.

The best case scenario for the Cyprus economy this year involves the following: a faster-than-expected vaccine rollout and vaccination process in Cyprus, and the EU, the availability of effective Covid-19 therapies,
and a steady improvement in the epidemiological conditions in Cyprus and abroad, the forecast said. Moreover, positive effects on the outlook, as well as on the medium-term prospects could arise from the successful absorption of EU funds and optimal use of the available EU instruments to mitigate the impact of
the pandemic.

The rise in economic sentiment at the EU-level is expected to facilitate the recovery in Cyprus in the following quarters, by creating a favourable external environment, the forecast noted.

“In 2021, the Cypriot economy is expected to recover as real GDP growth is projected at 3.7 per cent. The growth forecast for 2021 is revised downwards relative to the forecast in the previous issue, due to the resurgence of the pandemic in the last months of 2020 and the renewed containment measures.”

Inflation is expected to rise, thanks to the pace of recovery, in 2021. Inflation is forecast to reach 0.8 per cent in 2021 from -0.6 per cent in 2020.

In 2020, real GDP is expected to be finalised at -5.7 per cent, at about the same level forecast by the finance ministry, but lower than previously forecast by the centre due to a “stronger than anticipated rebound in economic activity.”

But the economists at the centre warn that the forecast and scenario is threatened by prevalent downside risks.

“Downside risks arise from the introduction of stricter measures to curb the spread of the pandemic, especially the new lockdown in January. Additional risks stem from delays in the vaccine rollout and vaccinations in Cyprus and the EU, as well as from a new wave of infections due to new variants of the virus. Slower-than-anticipated progress with vaccinations and/or a new surge in infections will cause setbacks to the reopening of economic sectors and slow down the recovery of domestic activity and external demand, particularly demand for tourist services,” the forecast warned.

The forecast expresses concern about pressures on public finances and a possible re-escalation in NPLs as the pandemic persists. Further delays in the implementation of overdue structural reforms (e.g. judicial system, public administration, local authorities) may undermine the country’s credibility, limit access to EU funds and weigh on the growth prospects, according to the economists at the centre.

Recovery showed green shoots in the third quarter of last year, according to the forecast.

“In the third quarter of 2020, construction and, to a smaller degree, professional activities almost returned to
their levels recorded in the corresponding quarter in 2019. Information and communication, real estate activities, as well as public administration, health and education continued to grow (year-on-year) throughout the first three quarters of 2020.

Following the sharp fall in the second quarter, private consumption recovered strongly in the third quarter,
surpassing its level in the same quarter in 2019. The consumption expenditure of the general government
continued to rise, albeit at a slower pace vis-à-vis the first two quarters of 2020. In the third quarter, the drop (year-on-year) in gross fixed capital formation moderated, mainly because the contraction in construction investment decelerated significantly.”

In 2021, CPI inflation is projected to rise to 0.8% from -0,6% in 2020 as the economy is expected to recover.