Inflation is forecast at 8,6% in 2022

Inflation is forecast at 8,6% and 3,4% for 2022 and 2023 respectively, while real GDP is forecast to grow by 4,9% in 2022 and 2,4% in 2023, the Center for Economic Research reports ( KOE) of the University of Cyprus in the October 2022 edition on the economic outlook.

It says real GDP is forecast to grow by 4,9% in 2022. The forecast is up 2,0 percentage points from the previous edition, as a result of strong growth in the second quarter and strong demand in the third quarter, mainly due to an increased tourist flow to Cyprus.

However, the negative effects of the ongoing war in Ukraine on economic activity appear to be unfolding more slowly than previously expected, affecting the outlook for 2023, and real GDP is forecast to grow by 2,4% in 2023, it notes.

Compared to the previous edition, the forecast is down by 0,4 percentage points due to various factors such as continued upward price pressures, worsening economic climate in the EU, weakening business confidence in the services sector and a rise in interest rates in the eurozone.

As it states, risks for a more unfavorable outlook than predicted prevail. As monetary and fiscal policies enter a normalization phase (after the pandemic crisis), the negative effects of the ongoing war in Ukraine on activity may intensify.

Further escalation of the war in Ukraine could intensify upward pressures on international commodity prices (e.g. oil, food), prolong high inflation and intensify the energy crisis in Europe, further increasing the cost of living and adversely affecting development, it is pointed out.

It added that lower-than-forecast growth rates could emerge if the slowdown in activity in the EU and the UK turns out to be more severe than expected. Monetary tightening (to combat high inflation) could negatively impact the domestic outlook if increases in government borrowing costs and corporate and household debt servicing costs are steeper than expected.

Furthermore, it is reported that due to the tightening of financial conditions, any fiscal measures to address the effects of high inflation of a universal rather than targeted nature may undermine the fiscal position and growth prospects. Also, a new outbreak of the pandemic COVID-19 in Cyprus and abroad may negatively affect economic activity through possible restrictive measures and potential disruptions in the supply chain.

Inflation (based on the Consumer Price Index) is forecast at 8,6% and 3,4% for 2022 and 2023 respectively.

The outlook for inflation is affected by the high levels of inflation recorded recently, as a result of large increases in international energy and food prices, combined with strong economic activity, it noted.

The depreciation of the euro against the dollar and rising expectations for selling prices in services also helped shape the outlook for inflation, he concludes.

Source: KYPE