The recession in Cyprus will be longer and deeper than previously forecast as the country tries to rein in its budget deficit and investor confidence sours, according to the European Commission.
Gross domestic product will fall 2.3 percent this year, 1.7 percent in 2013 and 0.7 percent in 2014, the European Union’s executive arm said in its autumn economic forecast, released today in Brussels. The commission previously forecast a 0.8 percent contraction in 2012 followed by a return to growth next year.
“The weakness of economic activity seen in the second half of 2011 is expected to intensify in 2012,” the commission said in the report. “The fiscal consolidation effort that has been pursued, the rapid deterioration in labor market conditions and the high degree of economic uncertainty have together weighed heavily on private consumption.”
Cyprus, whose banks took large losses from Greece’s sovereign debt restructuring this year, became the fifth of the euro area’s 17 member states to seek a bailout in June as its biggest lenders, Bank of Cyprus Pcl and Cyprus Popular Bank Pcl, sought state support. Its officials are in talks with the so-called troika that oversees euro-area rescue programs.
The Cypriot government’s budget gap is seen at 5.3 percent of GDP this year, widening to 5.7 percent next year and 6 percent in 2014 if no new measures are taken. Public debt will climb to 96.7 percent of GDP in 2013 from 89.7 percent this year, and will reach 102.7 percent in 2014, the commission said.