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Cyprus News Agency: News in English, 12-05-11

Cyprus News Agency: News in English Directory - Previous Article - Next Article

From: The Cyprus News Agency at <http://www.cyna.org.cy>


CONTENTS

  • [01] EU Commission on Cyprus` economic activity

  • [01] EU Commission on Cyprus` economic activity

    After a stronger first half in 2011, when Cyprus' GDP rose by 1.5% thanks to an exceptionally good tourist season, economic activity in the island was badly affected by the accident in July 2011, that destroyed the Vassilikos power station, the European Commission notes in its Spring Forecast, issued today. A huge blast in the naval base "Evaggelos Florakis" damaged on July 11 last year the nearby Vassiliko power plant, which accounted for half of the island's total electricity generation capacity.

    According to the report, domestic demand, traditionally the main driver of growth, decreased considerably in 2011. Tightening bank lending conditions, along with a worsening labour market outlook and weakening confidence, weighed on private consumption. In addition, subdued foreign demand for housing and the restructuring of corporate balance sheets kept investment on a correction path for the fourth year in a row. On the other hand, the external sector made a positive contribution to growth. Revenues from tourism increased by 13%, driven by political instability in competing Mediterranean tourist destinations and an increased flow of arrivals from emerging markets such as Russia.

    Nevertheless, it is added that with a current-account deficit above 10% of GDP, the external imbalance remained sizeable. The study predicts for 2012 that GDP will contract by 0.8%, due to a fall in domestic demand and the weaker external environment, notably including persistent financial market uncertainty. Private consumption will be restrained by the squeeze in disposable income, mainly among public sector employees, exerted by the fiscal restriction incorporated in the Budget Law 2012 adopted on 16 December 2011, as well as by the rise in unemployment to unprecedented levels.

    On public finances, the Spring Forecast notes that the government faces severe financing constraints. It is added that the deficit increased from 5.3% in 2010 to 6.3% in 2011, mainly due to lower revenues in the wake of the slowdown of economic activity and reduced corporate profitability. Driven by the recent consolidation efforts, the government deficit is set to narrow to 3.4% of GDP in 2012 and 2.5% GDP in 2013. On this basis, and in view of shrinking economic activity this year, the government debt-to-GDP ratio should remain on a rising trend and reach about 76% in 2012, mainly reflecting the stock-flow adjustment increasing debt due to disbursement in EFSF and ESM.


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