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Cyprus Economy to Shrink 1.1% in 2012, Central Bank Says

June 7 (Bloomberg) -- Cyprus’s economy, the euro area’s third smallest, may shrink as much as 1.1 percent this year and grow 0.4 percent in 2013, the Central Bank of Cyprus said.

“Uncertainty in relation to probable fiscal consolidation measures, the prospect of resorting to the rescue mechanism, the decline of corporate profitability and of real private disposable income and the increase of unemployment have contributed to a negative climate” affecting economic growth, the Nicosia-based central bank said in a statement on its website today.

The downside risks to growth of the Cypriot economy also include “the probability of an escalation of the political and financial turbulence in Greece following the June 17 elections” and further fiscal consolidation measures, according to the bank.

If additional government budget cuts and a probable resort to Europe’s rescue mechanism are done correctly, “the improvement in the credibility of the Republic of Cyprus may probably help overturn the economic climate, at least in the medium term with positive effects” on growth, the bank said.

The combined economy of the euro region may contract as much as 0.5 percent or grow as much as 0.3 percent this year, according to the central bank. Next year, the 17-nation currency bloc’s gross domestic product may grow as much as 2 percent, the bank said.

Cyprus’s unemployment rate will reach 10.1 percent this year and 10.8 percent in 2013, and the inflation rate will be 3.2 percent and 1.3 percent respectively according to standardized European methodology, the central bank said in a separate e-mailed statement.

To contact the reporter on this story: Stelios Orphanides in Nicosia at sorphanides@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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