BRUSSELS - The European Commission’s projections of the economic outlook for 2013, 2014 and 2015 in Cyprus point to a prolonged recession and GDP is expected to decrease by 3.5% in 2013.

According to the European Economic Forecast for Winter 2013 which was released Friday by the European Commission, the GDP in 2012 is expected to have decreased by 2.3% in 2012, in line with the autumn forecast. The GDP for 2013, 2014 and 2015 is expected to decrease by 3.5%, 1.3% and 2.3% respectively.

Inflation rate is expected to decrease to 1.5% in 2013 compare to 3.1% in 2012. For 2014 and 2015 Commission’s forecast show 1.4% and 3.2% respectively.

As regards unemployment, the Economic Forecast project that Cyprus’ unemployment in 2013 will rise to 13.7% compared to 12.1 in 2012. Further, for the years 2014 and 2015 the percentage is expected to be 14.2 and 12.1 respectively.

Commission projects that the public budget deficit will reach 1.2% in 2013, compared to 5.5% in 2012, whereas in 2014 it will show a surplus of 0.5% . In 2015 the public budget balance will show a deficit of 5.5%.

The Winter 2013 Forecast shows that the current account balance will decrease by 0.3% in 2013 compared to -1.1% the previous year. In 2014 the amount will be zero (0.0%) whereas in 2015 it will decrease by 1.1%.

According to the Commission, the largest fall in economic activity took place in construction and in the broad industrial sector, while financial services also showed sign of weakening activity. The fiscal consolidation implemented at the end of 2011, the significant deterioration in the labour market, and the prolonged high economic uncertainty concerning Cyprus`s request for financial assistance in June 2012 have all weighted on private consumption. The ongoing process of deleveraging also implied tightening credit conditions, which together with the high -level of corporate indebtedness and the weak business and consumer confidence (the lowest in the EU), hit investment activity strongly.

At the same time, the contribution of net exports to GDP growth is expected to have been stronger than previously anticipated due to the stronger export performance of goods and services (tourism being the main driver).

A significant decline in the volume of imports, mainly goods, resulted from the subdued domestic demand and lower import propensity.

While the trade balance is expected to have improved, the current account balance is projected to have worsened due to a deterioration of the income balance stemming from developments in the financial sector, particularly through its financial activities in Greece.

“The effects of much needed fiscal consolidation measures (including measures affecting public sector wages, social outlays, increases in employee contributions, and indirect taxes), coupled with increasing unemployment, are likely to weigh strongly on household disposable income”, the Commission says.

Furthermore, the report points out that on the back of banks deleveraging and the deceleration of credit growth, gross fixed capital formation is expected to decline further, with the growth rates of the construction activity remaining negative over the forecast horizon.

The external sector is set to provide a positive contribution to growth this year and next year. Prospects for the exports of goods and services remain favourable, particularly for tourism services (underlying the good prospects for high tourist arrivals particularly from Russia) and some business services (accounting, legal, and information society services).

At the same time, import of goods and services should continue to fall against backdrop of weak domestic demand.

Overall, the current -account balance is expected to improve gradually over the forecast horizon, driven by imports but yet conditional on the outlook of the income balance.

Labour market conditions are expected to have worsened in 2012 with the unemployment rate reaching a record 12.1% and to worsen further in subsequent years, reflecting the contraction of the economic activity. The subdued business activity, the hiring freeze in the public sector, and the developments in domestic demand have all weighted on employment in 2012 with job losses particular pronounced in the construction and agricultural sectors. Average wage growth in 2012 is expected to decline compare d to the previous year and the unfavourable economic environment is set to affect wages in the economy as a whole, influenced also by the cuts in public sector wages and benefits.

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