The Cypriot economy is expected to see an intensified recession, with an economic contraction of -2.3%, said the European Commission in its Autumn Forecast for 2012. The economy is expected to shrink by 1.7% in 2013, and by 0.7% in 2014. The government's deficit is set to be 5.3% of GDP, and could rise to 5.7% of GDP in 2013 and to 6% in 2014. General government debt will rise from 71.1% in 2011 to around 90% of GDP in 2012, after Laiki Bank was nationalised.
Government debt-to-GDP ratio is projected to reach 96.7% in 2013 and 102.7% in 2014. Cyprus' application to the European Financial Stability Fund (EFSF) reflects signficant downside risks for public finances and the financial sector, testing the economy's sustainability, said the Commission. ''Failure to raise the required capital and to put policies back on a sustainable path could dramatically worsen the outlook,'' says the forecast. The island's financial sector is negatively affected by Greek debt and volatility in the European markets, said the Commission as CyprusNewsReport.com writes. The crucial construction sector, normally a source of strong economic development, is expected to continue to weaken in 2012 and 2013, said the Commission. This is in spite of the reconstruction work at Vasiliko power plant, which was critically damaged in the explosion in 2011. The labour market is expected to worsen in 2012 and subsequent years, reflecting the slowdown in economic activity, says the survey. Job losses will be extreme in construction and trade, and the unemployment rate will rise from 7.9% in 2011 to 12.1% in 2012 and to 14% by 2013. Wage growth will be negative, and the freezing of public sector wages until 2014 will affect wages in the economy as a whole, said the Commission. Economic and fiscal imbalances added to widespread loss of confidence among economic agents along with a high degree of economic uncertainty have weighed on private consumption, says the survey. Domestic demand will be markedly weaker, driven by weaker consumer confidence and lower disposable income. Bright spots are in tourism and business services, which are expected to perform well in 2012 and in the coming years, reflecting increased numbers of Russians and other countries.