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Cyprus Central Bank Revises GDP Growth Projections Upward

by THEFUTURE.TEAM

December 20, 2024

The Central Bank of Cyprus (CBC) has revised its GDP growth forecast for 2024, increasing it by 0.2 percentage points to 3.7%. This adjustment reflects stronger domestic demand, with private consumption playing a pivotal role, supported by the continued resilience of the Cypriot economy.

However, forecasts for 2025-2026 have been slightly downgraded due to the impact of rising imports needed to meet elevated domestic demand. While exports, particularly non-tourism services, remain a growth driver, they are not sufficient to fully offset the increase in imports.

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Labor Market Nearing Full Employment

The labor market in Cyprus continues to strengthen, with unemployment expected to fall to 5% in 2024, down from 5.8% in 2023. This trend is forecast to continue, with unemployment rates projected to drop to 4.9% in 2025, 4.7% in 2026, and 4.6% in 2027, approaching conditions of full employment.

The improved GDP outlook has led to a downward revision of the 2024 unemployment forecast by 0.1 percentage points. The sustained growth momentum of the economy is seen as the key factor driving this positive trend.

Inflation Stabilizing Towards Target Levels

Inflation, as measured by the Harmonized Consumer Price Index (HICP), is expected to decline to 2.2% in 2024 from 3.9% in 2023, moving closer to the medium-term target of 2%. This stabilization is attributed to easing external inflationary pressures, including a reduction in energy and raw material prices, as well as the lagged effects of eurozone monetary policy, which continues to temper inflation.

Wage growth is anticipated to remain moderate, helping to limit inflationary pressures. However, the gradual introduction of a green carbon tax from 2025 may result in modest fuel price increases.

The normalization of inflation for industrial goods (excluding energy) is also expected between 2025 and 2027, following the high levels seen in 2022-2023. Core inflation—excluding energy and food—is forecast to decline from 3.8% in 2023 to 2.6% in 2024, 2.0% in 2025, 1.9% in 2026, and 2.0% in 2027. Service price inflation is expected to decelerate during the 2025-2027 period.

The 2024 inflation forecast was revised upward by 0.1 percentage points compared to September 2024 projections, reflecting higher-than-expected service price inflation.

Risks And Prospects

The economic outlook for 2024 is balanced, while projections for 2025-2027 suggest a slight increase in downside risks.

Key downside risks include ongoing geopolitical tensions and weaker-than-expected external demand amid heightened global trade uncertainty. Domestically, the introduction of new taxes on multinational corporate profits could negatively impact economic performance, although the extent of this effect is uncertain. Slower-than-expected easing of financing conditions may also curb domestic demand.

On the upside, stronger-than-anticipated private consumption, driven by lower household savings rates, could boost economic performance.

Inflation risks for 2024 are balanced, while those for 2025-2027 lean slightly upward. Upside risks include potential geopolitical escalations, trade policy uncertainties (such as new US tariffs and EU retaliatory measures), and climate-related impacts like extreme weather events and the implementation of green taxation. Wage growth exceeding expectations and higher corporate profit margins could also contribute to inflationary pressures.

Conversely, inflation could underperform baseline projections if financing conditions ease more slowly than expected or if heightened geopolitical tensions unexpectedly weaken the global economic environment.

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ECB Launches Geopolitical Stress Tests For 110 Eurozone Banks

The European Central Bank is preparing a new round of geopolitical stress tests aimed at assessing potential risks to major financial institutions across the euro area. Up to 110 systemic banks, including institutions in Greece and the Bank of Cyprus, will take part in the exercise, which examines how geopolitical events could affect financial stability.

Timeline And Testing Process

Banks are expected to submit initial data on March 16, 2026. Supervisors will review the information in April, while the final results are scheduled to be published in July 2026. The process forms part of the ECB’s broader supervisory work to evaluate financial system resilience under different risk scenarios.

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Geopolitical Shock As The Primary Concern

The stress tests place particular emphasis on geopolitical risks. These may include armed conflicts, economic sanctions, cyberattacks and energy supply disruptions. Such events can affect banks through changes in market conditions, borrower solvency and sector exposure. Lending portfolios linked to regions or industries affected by geopolitical developments may face higher risk levels.

Reverse Stress Testing: A Tailored Approach

Unlike traditional stress tests that apply the same scenario to all institutions, the reverse stress test requires each bank to define a scenario that could significantly affect its capital position. Banks must identify a geopolitical shock that could reduce their Common Equity Tier 1 (CET1) ratio by at least 300 basis points. Institutions are also expected to assess potential effects on liquidity, funding conditions and broader economic indicators such as GDP and unemployment.

Customized Risk Assessments And Supervisor Collaboration

This methodology allows banks to submit risk assessments based on their own exposures and operational structures. The approach is intended to help supervisors understand how geopolitical events could affect institutions differently and to support discussions between banks and regulators on risk management and contingency planning.

Differentiated Vulnerabilities Across Countries

A joint report by the ECB and the European Systemic Risk Board indicates that countries respond differently to geopolitical shocks. The Russian invasion of Ukraine led to higher energy prices and inflation across Europe, prompting central banks to raise interest rates. Belgium, Italy, the Netherlands, Greece and Austria experienced increases in borrowing costs and lower investor confidence. Germany, France and Portugal recorded more moderate changes, while Spain, Malta, Latvia and Finland showed intermediate levels of exposure.

Conclusion

The geopolitical stress tests will not immediately lead to additional capital requirements for banks. Their results will feed into the Supervisory Review and Evaluation Process (SREP). ECB supervisors may use the findings when assessing capital adequacy, risk management practices and operational resilience at individual institutions.