CYPRUS ECONOMIC OVERVIEW
Cyprus’ economy emerged from recession in 2015, with real GDP growth reaching 2.9% year-on-year in the second quarter of 2016. The recovery has been primarily driven by domestic demand, amid declining consumer prices and an improving labour market. The tourism sector, benefitting from measures to extend the season, improved air connectivity, and geopolitical tensions in the competing markets has provided significant support to positive economic growth.
The Cypriot banking system in particular has undergone a deep transformation- since March 2013 the reform measures, which have been executed or are underway, are essential to restoring the Cypriot financial system to viability. However, despite the fact that demand for loans is slowly increasing, the percentage of non-performing loans remains high and the pace of lending is subdued.
Following the progress made over the past year, the European Commission significantly revised its forecasts in relation to the Cyprus economy
Real GDP growth is expected to reach 2,5% in 2017 and then to moderate gradually to 2.3% in 2018. An important factors leading to stabilized economy are the improved outlook for investment based on the stabilizing housing market in Cyprus and the increase in private consumption. The European Commission noted the growth in the tourism sector and expects it to continue, contributing to job creation while exerting upward pressure on wages and unit labour costs.
Inflation is expected to increase and return to positive territory in 2017, although it is expected to remain moderate Meanwhile, the “more pronounced” domestic private demand growth is expected to slow down owing to the ongoing deleveraging and continued loan restructuring efforts by banks, combined with weak lending activities. It appears that unemployment in Cyprus reached its peak in December 2013, with 50.467 registered unemployed persons.
Significant progress has been made in the financial sector as a result of the recapitalisation and restructuring of credit institutions. The decision of the Central Bank of Cyprus in February 2015 to decrease the maximum deposit rate by 1% led also to the declining trend of interest rates in 2015, which has continued in 2016. The average interest rates on new corporate loans (excluding bank overdrafts) have decreased to 3.94% in the 3rd Quarter of 2016 compared to 4,29% in the same period of 2015.