Blog Post

New EC spring forecasts: high uncertainty dominates outlook for Cyprus

Last Friday the European Commission released the spring update on their economic forecasts for European Union member states and some other advanced economies. Negative growth forecasts for the EU and the euro area reflect weakness in the periphery as well as in the core countries. The 2013 growth forecasts for the big European economies were all revised down. Major changes were made to the economic forecasts for Cyprus.

By: Date: May 7, 2013 Topic: European Macroeconomics & Governance

Last Friday the European Commission released the spring update on their economic forecasts for European Union member states and some other advanced economies (see the report here and the database here). Negative growth forecasts for the EU and the euro area reflect weakness in the periphery as well as in the core countries. The 2013 growth forecasts for the big European economies were all revised down. Major changes were made to the economic forecasts for Cyprus.

The Commission lowered their real GDP forecast for the EU from 0.1% to -0.1% in 2013. For the euro area they expect -0.4% growth in 2013 (previously -0.3%). Growth is anticipated to “to turn positive gradually in the second half of the year before gaining some traction in 2014” (European Commission 2013). As a result, real GDP is expected to grow by 1.4% in 2014 (previously 1.6%) in the EU and by 1.2% (previously 1.4%) in the euro area.

The figure below shows the new forecasts by the EC. The Commission expects nine European economies (Cyprus, Czech Republic, France, Greece, Italy, Netherlands, Portugal, Slovenia and Spain) to be in recession in 2013. Seven of them are projected to return to growth next year.

Figure 1: Real GDP forecasts

Source: AMECO database.

While the latest batch of EC forecasts overall is slightly more cautious, the by far largest changes were made to the Cypriot outlook. Real GDP is expected to collapse by -8.7% in 2013 and by -3.9% in 2014. The following figure illustrates the massive revisions that were made to the winter real GDP projections for Cyprus as released in February.

Figure 2: Real GDP forecast for Cyprus

Source: AMECO database.

Overall the economy is expected to shrink by around 14% in 2012-2014. The Commission expects this as a result of the fast restructuring of the banking sector, fiscal consolidation and generally high economic uncertainty (European Commission 2013). Additionally, the report stresses the negative impact on growth of the temporary imposition of capital controls and the expected decline in private consumption and investment due to the bail-in of uninsured depositors; measures that obviously were not taken into account in the winter forecast. It does not come as a surprise that the unemployment rate is expected to push to unprecedented levels in turn.

The economic projections for Cyprus look similarly painful as the Greek recession in 2011 (real GDP -7.1%). However, bear in mind that for Greece 2011 was only one of several years with negative growth and the Greek economy did not have to cope with the side effects of capital controls and a bail-in of uninsured depositors. These factors make an even faster contraction in the case of Cyprus very likely. One thing is for sure however, they add to the high degree of uncertainty that these forecasts come with. It does not surprise that the Commission sees significant downside risks to their projections due to the implementation of the agreed macroeconomic adjustment programme. In their latest World Economic Outlook (see the report here), the IMF decided to simply exclude any projections for Cyprus due to the high degree of uncertainty that the on-going crisis comes with. The forecasts of the EC for the Cypriot economy have to be handled very carefully. Substantial downside risks exist. Neither of the institutions gives any indication on when the Cypriot economy will return to growth.

References

European Commission (2013), ‘European Economic Forecast Spring 2013’, European Economy, 2/2013.

International Monetary Fund (2013), ‘Hopes, Realities, and Risks’, World Economic Outlook, April 2013. 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Upcoming Event

Sep
1
12:30

The EU recovery fund - state of play and outlook

Bruegel Annual Meetings, Day 1- In this session we will discuss the EU recovery fund, its state of play and outlook.

Speakers: Nadia Calviño, Karolina Ekholm and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Upcoming Event

Sep
2
10:00

Conversation on the recovery programmes

Bruegel Annual Meetings, Day 2- In this session, we discuss the recovery programmes.

Speakers: Maria Demertzis, Henry Foy and Tadeusz Kościński Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event
 

Upcoming Event

Sep
2
13:00

European banks: under global competitive pressure?

Bruegel Annual Meetings, Day 2 - European banks have lost stature and remain generally low-profitability, low-valuation in comparison to their global peers. Is that a problem? If so, what can EU policymakers do to address it?

Speakers: José Antonio Álvarez Álvarez, Mairead McGuinness and Nicolas Véron Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Upcoming Event

Sep
2
15:45

Blending physical and virtual: shaping the new workplace

Bruegel Annual Meetings, Day 2 - This panel will cover the changes the COVID-19 pandemic made to our workplaces, and what to expect in the near future.

Speakers: Nicholas Bloom, Michael Froman, Mario Mariniello, Sara Matthieu and Luca Visentini Topic: European Macroeconomics & Governance Location: Academy Palace
Read about event More on this topic
 

Upcoming Event

Sep
3
10:15

Conference on the Future of Europe: envisioning EU citizens engagement

Bruegel Annual Meetings, Day 3 - Panellists will discuss different options and what they may entail while revisiting the debates on the future of Europe at national and EU-level that have been conducted thus far.

Speakers: Caroline de Gruyter, Kalypso Nicolaïdis, Niclas Poitiers and György Szapáry Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Upcoming Event

Sep
3
09:00

The role of the EU's trade strategy for an inclusive and sustainable recovery

Bruegel Annual Meetings, Day 3 - We are delighted to welcome Valdis Dombrovskis, Executive Vice President of the European Commission for An Economy that Works for People to talk about Europe's trade strategy.

Speakers: Valdis Dombrovskis, Alicia García-Herrero and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read article
 

Blog Post

Will European Union recovery spending be enough to fill digital investment gaps?

The recovery facility will boost digital transformation, but questions remain whether it will be sufficient to achieve Europe’s digital ambitions.

By: Zsolt Darvas, J. Scott Marcus and Alkiviadis Tzaras Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 20, 2021
Read article Download PDF
 

Policy Contribution

A new direction for the European Union’s half-hearted semiconductor strategy

The EU needs a more targeted strategy to increase its presence in this strategic and thriving sector, building on its existing strengths, while accommodating its relatively low domestic needs.

By: Niclas Poitiers and Pauline Weil Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 15, 2021
Read article More by this author
 

Blog Post

Fit for 55 marks Europe’s climate moment of truth

With Fit for 55, Europe is the global first mover in turning a long-term net-zero goal into real-world policies, marking the entry of climate policy into the daily life of all citizens and businesses.

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: July 14, 2021
Read article More on this topic
 

Blog Post

Fair vaccine access is a goal Europe cannot afford to miss – July update

European countries must do more to tackle the vaccine uptake gap. Vaccination data should be published at the maximum granularity level so researchers and local decision-makers can monitor progress.

By: Lionel Guetta-Jeanrenaud and Mario Mariniello Topic: European Macroeconomics & Governance Date: July 14, 2021
Read article More by this author
 

Blog Post

SPACs in the gap

Special-purpose acquisition vehicles could fill a gap in European equity markets and lure risk-averse investors off the sidelines.

By: Rebecca Christie Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: July 13, 2021
Read article More on this topic
 

Blog Post

A breakdown of EU countries’ post-pandemic green spending plans

An analysis of European Union countries’ recovery plans shows widely differing green spending priorities.

By: Klaas Lenaerts and Simone Tagliapietra Topic: European Macroeconomics & Governance Date: July 8, 2021
Load more posts