Cyprus’s Economic Slump Shows Milder Decline in Third Quarter

Cyprus’s economy contracted at the slowest pace so far this year in the third quarter as the country adapted to the closure of its second-largest lender and the introduction of the euro area’s first capital controls.

Gross domestic product declined 0.8 percent from the second quarter, when it fell 1.8 percent, the Cyprus Statistical Service said today in a statement on its website. That’s the ninth consecutive quarterly contraction. The economy shrank 5.7 percent on a seasonally adjusted basis from the same quarter in 2012. That compared with a 5.8 percent yearly fall in the second quarter.

“A milder fall was expected and is good news,” said Fiona Mullen, director of Nicosia-based Sapienta Economics. “But this could just be a pause for breath before a steeper decline as banks are under heavy pressure to pursue non-performing loans and some big household names are heavily indebted.”

Cyprus secured a 10 billion-euro ($13.4 billion) loan accord in March to avoid a financial collapse. In return, it pledged to tighten its budget, force losses on bank deposits of more than 100,000 euros at the country’s two largest lenders and impose capital controls. Under the agreement, Bank of Cyprus, the country’s largest bank, absorbed the second-largest lender, Cyprus Popular Bank.

Troika Forecasts

The so-called troika of the European Commission, European Central Bank and International Monetary Fund revised its macroeconomic forecasts for Cyprus on Nov. 7, with GDP expected to contract 7.7 percent this year and 4.8 percent in 2014, before gradually recovering in 2015. That compared with initial bailout forecasts for output to shrink 8.7 percent this year and 3.9 percent next year.

The situation in the country remains difficult with falling disposable income and rising unemployment, IMF Mission Chief for Cyprus Delia Velculescu said. Construction and manufacturing were particularly hit by the downturn in the third quarter, the statistics service said today.

Building permits issued, an indication of future building activity, fell 25 percent in the January-August period while unemployment in October rose nearly 30 percent on the year, according to the service.

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