Resilient households curbed the contraction. Economic activity is expected to contract in 2013 and 2014 but growth is set to resume in 2015. Unemployment rates reached historical high levels, while inflation remains weak.
Economic activity continued its decline in the first half of 2013, although to a lesser extent than foreseen in the Spring 2013 European Economic Forecast, as private consumption proved less weak than anticipated. Consumer confidence and business sentiment indicators hit historically low levels following the agreement of an economic adjustment programme for Cyprus in April. Although some improvement in the indicators has been observed since, they continue to point to further contraction in activity for the coming quarters.
In 2015, the recession is expected to come to an end and growth is foreseen to resume gradually, as private domestic demand regains strength. At the same time, the restoration of a sound and well-capitalised banking sector is expected to gradually loosen the tight credit conditions, supporting domestic demand.
The profound contraction in economic activity in 2013 and 2014 is expected to weigh on employment and push unemployment to unprecedented levels. Despite the significant consolidation effort undertaken in line with the programme requirements, the general government deficit is expected to increase in 2013.
Debt is expected to sharply increase in 2013, mainly as a result of the participation of the government in the recapitalisation of the banking sector. The debt-to-GDP ratio is projected to further increase in 2014 and 2015, reflecting the weak GDP growth.
Risks are tilted to the downside. On the domestic front, a more protracted period of disruptions to efficient credit intermediation alongside tighter credit supply conditions and a further deterioration in the confidence in the banking sector could pose considerable risks to the real economy.
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