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.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read article Download PDF More on this topic

Policy Brief

One size does not fit all: European integration by differentiation

The need for reform of the EU is increasingly urgent. The authors of this policy brief suggest a new governance model, combining a bare-bones EU with a 'Europe of clubs'. Such reform would offer scope for broad membership without stalling the process of integration for those that wish to pursue it.

By: Maria Demertzis, Jean Pisani-Ferry, André Sapir, Thomas Wieser and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 19, 2018
Read about event More on this topic

Past Event

Past Event

Crypto assets: is a regulatory framework needed?

The economic potential and risks of crypto assets: is a regulatory framework needed?

Speakers: Thierry Philipponnat and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: France Stratégie, 20 avenue de Ségur, 75007 Paris Date: September 19, 2018
Read about event More on this topic

Past Event

Past Event

Structural reforms in Europe: policy lessons from the crisis

When are structural reform efforts successful in fostering productivity and growth when and why do they fail?

Speakers: Ana Fontoura Gouveia, Paolo Manasse, Klaus Masuch and Alessio Terzi Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 18, 2018
Read article More on this topic More by this author

Blog Post

Reforming the EU fiscal framework

Researchers have often highlighted the problematic nature of the currently very complex EU fiscal framework. Here we review economists’ views on how it should be changed.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: September 17, 2018
Read article More by this author

Podcast

Podcast

Director’s Cut: Europe’s migration policy challenge

Immigration is one of the most contentious policy matters currently facing the EU. In this Director’s Cut of ‘The Sound of Economics’ Bruegel director Guntram Wolff welcomes Ana Palacio, member of the Spanish council of state and former foreign affairs minister, as well as Bruegel visiting fellow Elina Ribakova for a constructive discussion as to which approaches will yield the best results.

By: The Sound of Economics Topic: European Macroeconomics & Governance, Global Economics & Governance Date: September 14, 2018
Read article More on this topic

Blog Post

The economic case for an expenditure rule in Europe

Proposals for reforming the euro area back on the agenda. An overhaul of the European fiscal rules should be on high on this agenda, because the current fiscal framework has not worked well. This column proposes substituting the numerous and complex present rules with a new, simple rule focused on limiting annual growth rate of expenditures.

By: Zsolt Darvas, Philippe Martin and Xavier Ragot Topic: European Macroeconomics & Governance Date: September 13, 2018
Read article Download PDF More on this topic

External Publication

The EU’s Multiannual Financial Framework and some implications for CESEE countries

Bruegel scholars Zsolt Darvas and Guntram Wolff contributed to the September 2018 edition of the OeNB's Focus on European Economic Integration.

By: Zsolt Darvas and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 12, 2018
Read about event More on this topic

Past Event

Past Event

Reforming Europe's fiscal framework

This event will discuss reforming Europe's fiscal framework in order to make it less complex and more effective.

Speakers: Zsolt Darvas, Lars Feld, Philippe Martin, Lucio Pench and Beatrice Pierluigi Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 12, 2018
Read article More on this topic More by this author

Opinion

Should central European EU members join the euro zone?

Eurozone membership (or the use of a fixed exchange rate) was not a factor determining economic success in Central Europe. There were both good and bad macroeconomic performances in both the flexible and the fixed exchange rate regimes of Central European countries. The implication is that Central European “outs” could be economically successful both with and without the euro, yet the EU is not only about economic benefits.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: September 11, 2018
Read about event More on this topic

Upcoming Event

Oct
23
12:30

Europe: Back to the future of a political project

This event will feature a discussion on different ideas for reforming European Governance.

Speakers: Ulrike Guerot, Adriaan Schout and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic

Blog Post

The higher yield on Italian government securities could soon be a burden for the real economy

The increase in the spread between Italian (BTP) and German (Bund) government securities is directly an additional burden for Italy public finance, and thus for tax payers. But it could soon also become a burden for the real economy, as the increased yield on Italian government securities could pull up the cost of bank loans for Italian firms, thus imparting a deflationary impact onto the economy.

By: Francesco Papadia and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: September 10, 2018
Read article Download PDF

Policy Contribution

The economic potential and risks of crypto assets: is a regulatory framework needed?

What is the economic potential and the risks of crypto assets? Regulators and supervisors have taken great interest in these new markets. This Policy Contribution is a version of a paper written at the request of the Austrian Presidency of the Council of the European Union for the informal ECOFIN meeting of EU finance ministers and central bank governors.

By: Maria Demertzis and Guntram B. Wolff Topic: European Macroeconomics & Governance, Testimonies Date: September 6, 2018
Load more posts