The University of Cyprus` Economic Research Centre (ERC) has issued its July 2012 forecasts, indicating that the Cypriot economy will continue to be in recession throughout 2012, followed by a modest recovery in 2013.

According to the ERC, the Cypriot economy will contract by 1.8% GDP in the second quarter followed by a contraction of 1.4% and 1.2% for the third and fourth quarter respectively. The Cypriot economy will contract by 1.5% throughout 2012, the ERC notes.

For 2013, the ERC projects a modest growth of 0.1% for Q1 and 1.2% for Q2 while GDP growth for the first six months is projected at 0.6% GDP.

However the centre notes that this projection “could be accompanied by some downside risks.”

“The continued economic recession could exert pressure on the already troubled public finances, push unemployment at even higher levels, damage even further the confidence in the capacity of the economy to recover from the crisis and worsen the adverse domestic credit conditions at a time when the banks are in financial distress,” the ERC points out.

According to the ERC, “amidst the economic crisis Cyprus is currently experiencing, there is urgent need for policy measures and structural reforms to be undertaken in order to ensure the sustainability of public finances and to salvage the wobbling domestic banking system.”

The Centre suggests reforms to address structural problems of the government payroll and the system of state benefits, inefficiencies of public provision systems, such as education, health care and the state controlled utilities/organizations, the unsustainability of the state pension system, the ineffectiveness of the tax collection system and the welfare loss from distortive taxation and the failure to curb the power of narrow interest groups in the product, labour and financial markets.

Furthermore, the ERC notes that due to the recessionary condition of the economy and low foreign inflation, inflation in Cyprus is forecast at 3.0% for 2012 and at 2.2% for the first half of 2013. Inflation for the third and fourth quarter of 2012 is forecast at 3.2% and 3.0% respectively, while it is projected to decrease to 2.0% and 2.3% in the first and second quarter of 2013, respectively.

Noting that notwithstanding the downside risks mentioned above, the forecasts suggest that the recession will recede early in 2013, the ERC concludes noting that “the measures implemented should be geared towards correcting distortions rather than constraining economic activity and dampening the medium-term prospect of exiting recession.”