Since March 2020 we have predicted a -5% contraction for the economy of Cyprus, well against consensus expectations of a contraction ranging between -7.5% to -14%. According to CYSTAT, real G.D.P. for the year 2020 is estimated at €20.528,3 mn at constant prices compared to €21.632,4 mn in 2019. The growth rate in real terms is estimated at -5.1% in 2020, compared to 3,1% in 2019 (our forecast for 2019 was 3.2%).

Fuelled by pent-up demand from consumers, who are sitting on a pile of excess savings (see Table 1), as well as unprecedented policy support from the government (a widely used short-term work scheme, together with continuous targeted relief measures for businesses and the self-employed, are helping to curb the rise in unemployment) and the ECB, we expect growth to do better than what the market expects over the next two years.

We look for a robust rebound in household consumption, underpinned by rising confidence, relatively stronger balance sheets, stable labour income and a large stock of extra savings. The rebound from the COVID-19 recession will be different; it should be much faster than the recovery from the 2013 recession which required a lengthy period of adjustment before animal spirits could take over again.

Across institutions, our forecasts for real GDP growth are above consensus: 4% for 2021 and 4.2% for 2022. Over the medium-term horizon, the Cyprus economy is expected to see continued growth, bolstered to an important extent by the EU Recovery and Resilience Fund (RRF).

Our upbeat forecasts have been resting on three key assumptions about the pandemic: (i) Restrictions would be eased before the end of Q2; (ii) We will have at least half a summer season in 2021; and (iii) New virus variants will not require new widespread lockdowns this autumn. So far, we seem to be well on track to meet the first two assumptions. Of course, setbacks are possible. The recent surge in infections in major emerging markets, notably in India, adds to the risk that new virus mutations may eventually render vaccines less effective.