PRESS RELEASE 27 March 2020

Cyprus economy could shrink by up to 9.2 per cent this year – Sapienta Economics

Real GDP could contract by between 3.5 per cent and 9.2 per cent in 2020, according to Nicosia-based research consultancy Sapienta Economics, as the hit from the Covid – 19 virus to tourism and most of the retail sector is partly offset by an increase in food sales, healthcare and public spending.

The Cyprus government banned all incoming flights on 21 March. Restrictions on the movement on residents have also gradually been tightened. From 25 March, residents needed permission to leave their homes.

“In our monthly Country Analysis Cyprus report, we normally just give a single figure for the GDP growth forecast,” said Sapienta Economics director, Fiona Mullen.

“But with the situation changing rapidly, we have produced a low, medium and high forecast for our March report. The smallest decline is 3.5 per cent, the baseline decline is 6.2 per cent, while the largest decline is 9.2 per cent,” she added.

In its worst-case scenario, Sapienta Economics assumes that there are zero tourism arrivals in April, May and June, and that by December, arrivals are still only 60 per cent of their levels in 2018-19. In the best-case scenario, tourists start trickling in as early as May, but are only 10 per cent of previous levels. They then gradually rise to 80 per cent of previous levels by December, where they also remain in 2021.

Tourism is smaller than in 2000

One reason why the real GDP decline is not in double digits is that non-tourism sectors have grown in size in the past two decades.

“Tourism remains a key driver of growth in Cyprus, accounting for 6.1 per cent of GDP in 2019, and with obvious knock-on effects for sectors such as construction and retail,” said Mullen.

“However, its impact is not as big as it was in the past, having been overtaken by sectors such as finance and insurance, professional services and real estate. “We estimate that these days the total contribution of tourism to GDP is 12 per cent, down from almost 20 per cent in 2000,” she added.

The Sapienta forecast assumes that the hit to most of the non-tourism sectors is similar to 2013, when Cyprus suffered a severe banking crisis and real GDP contracted by 6.6 per cent. For example, in the baseline scenario, the construction sector is forecast to decline by almost 20 per cent this year.

Cypriots and their food

One sector that is expected to grow, however, is food sales.

“What we saw in 2013 was that, despite the crisis, or even because of it, food sales grew very strongly,” said Mullen.

“This time food sales are going to be affected by the absence of tourists, of course, but according to our calculations, food sales to residents account for almost 90 per cent of the total, so they have the biggest impact.”

The other three sectors that Sapienta expects to grow this year are healthcare, information and communications, and the public sector.

Bounceback in 2021

In its baseline forecast, Sapienta Economics currently expects a rapid bounceback in 2021, with real GDP growth reaching 6.4 per cent in 2021. In its best-case scenario, growth in 2021 could reach as much as 12.1 per cent.

Mullen notes that much depends on how long the virus crisis lasts and the government measures to try and alleviate the crisis.

“Our forecast is going to be a work in progress for the next few months,” said Mullen.

“Ultimately the depth of the decline and the scale of the bounceback will depend on how effective the government’s 2 billion euros worth of measures will be in preventing mass unemployment.”

“The government has a lot of fiscal space, so a lot of fire-power. But we are also in unchartered waters.”