ERC: Inflation at 8.6% in 2022, real GDP growth at 4.9% in 2022

Consumer Price Index inflation is forecast at 8.6% and 3.4% for 2022 and 2023, respectively, while real GDP growth in 2022 is projected at 4.9% and in  2023 is forecast at 2.4%, the Εconomics Research Centre of the University of Cyprus says.

In its economic outlook issue for October 2022, it notes that real GDP growth in 2022 is projected at 4.9%, up by 2.0 percentage points compared to the forecast in the July issue.

It says that the upward revision resulted from strong activity growth in the second quarter and robust demand during the third quarter, especially external demand for tourist services. However, it adds, the negative effects of the ongoing war in Ukraine on economic activity appear to be unfolding more slowly than previously thought, impacting the outlook for 2023.

Real GDP growth in 2023 is forecast at 2.4%, down by 0.4 percentage points relative to the forecast in the July issue. The downward revision was driven by several factors, including sustained upward price pressures, the deterioration of economic sentiment in the EU, the weakening of business confidence in services in Cyprus, and the uptick of lending interest rates in the euro area, it says.

“The risks to the growth outlook are currently on the downside. As monetary and fiscal policies normalise, the adverse effects of the ongoing war in Ukraine on activity may build up. Further escalation of Russia’s war in Ukraine could amplify upward pressures on commodity prices, prolong high inflation and deepen the energy crisis in Europe, increasing the cost of living further and negatively affecting growth”.

It notes that lower-than-projected growth rates in Cyprus may arise if the slowdown in the EU and the UK turns out to be more severe than expected adding that the tightening of monetary policy may pose risks to the domestic outlook, if the increases in sovereign borrowing costs and debt servicing costs for firms and households are steeper than anticipated.

In view of the tightening financial conditions, universal (instead of targeted) fiscal measures to counter the effects of high inflation, may undermine the fiscal position and cloud the growth prospects. Also, new COVID-19 outbreaks in Cyprus and abroad may hamper economic activity through possible containment measures and renewed supply chain disruptions, it says.

Regarding inflation, it notes that CPI inflation is forecast at 8.6% and 3.4% for 2022 and 2023, respectively.

The inflation outlook is mainly driven by the recent acceleration of inflation, as a result of strong increases in international prices of energy and food in combination with robust economic activity. The depreciation of the euro against the US dollar and upward revisions in selling price expectations in services have also influenced the inflation outlook, it concludes.




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