Cyprus s recovery from recession will continue in ---- and ---- as consumption picks up, the government eases fiscal policy, and a resur- gence in the crucial tourism, real estate, and financial sectors boosts activity across the economy. A deal to reunify Cyprus, which we see as a possibility in ----, would pave the way to stronger economic growth over the next decade. ...Meanwhile, the Cypriot financial sector s recovery has been helped by the recapitalisation of the banking sector and measures taken by the European Central Bank to increase liquidity and credit provision in the euro area. While the country will not fully regain its pre- crisis status as an offshore financial centre, gross value added in the financial and insurance sector turned higher on a y-o-y basis in Q--- after major contractions in ---- and ----, and we expect further modest growth going forward. Finally, tourism, which makes up around -- of GDP and around one-third of services exports, is enjoying a renaissance that we expect to continue. International arrivals hit a ---year high of -.--mn people in on a ---month cumulative basis in November, despite a major decline in Russian tourists. Tourism will continue to be boosted by an improving eurozone economic - Business Monitor International Ltd www.bmiresearch.com
...Private Consumption: While demand will recover somewhat over the next few years, and private final consumption will remain a little below -- of Cypriot GDP, our central view is that the unsustainable credit-fuelled consumption of the pre-crisis period will not be repeated. The key medium-term dynamic is the need for internal devaluation in the economy, in which Cypriot unit labour costs fall relative to the country s international trading partners to the extent that Cyprus workforce once again becomes internationally competitive. ...Real private consumption growth will average -.- annually over the ------- period, a far cry from the unsustainable -.- average in the decade leading up to the ---- peak. Government Consumption: The ---- bailout programme has set Cyprus on a more sustainable fiscal path significant auster- ity with a structural reduction in government spending over a long-term horizon, and primary budget surpluses set to reach -.- of GDP in ---- and beyond. In particular, the Cypriot government is paring back on large consumption expenditures by laying off thousands of state employees and virtually elimi- nating new hiring. ...Net Exports: After being a significant drag on the economy prior to the crisis, the external sector has been a net positive contributor to growth since ---- as domestic demand has col- lapsed. While weak domestic conditions have been the main -- Business Monitor International Ltd www.bmiresearch.com
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