The question above, which this article wishes to address, reflects the chasm between opinions, as to the nature of Cyprus’ economic growth today and, ultimately, the relationship (should one exist) between economic growth and levels of financial inequality amongst the population. One point of view is that Cyprus has entered a revolutionary era of elite development, clearly witnessed by a blind eye staring at Limassol in its rapidly growing real estate landscape, especially during the last 10 years. The other side of the story being that many locals living in Cyprus (especially Limassol) are now feeling higher costs of living to the bone, struggling to get by at this moment more than ever before in their lives. The Battle between David and Goliath unfolds in an everyday reality.

The answer, however, to the dilemma may just be lying in a simple explanation. Today’s landscape suggests that one concept (economic growth) may exactly be causing the other (growing inequality), through a very distinct and specific relationship in the case of Cyprus. It is particularly interesting to review the following opinion extract, taken from an article published in the Cyprus Mail in February 2023:

“In Cyprus, economic inequality compares favourably in a European context, but presents a concerning widening trend. It mainly relates to new entrants in the labour market and retirees and has, in part, been boosted by the marked immigration of high-income strata from abroad. These trends should be seriously considered and addressed with targeted social measures, which do not create distortions in terms of economic development.” (Charalambous & Pissarides, 2023)

In other words, when compared to Europe as a whole, our country is performing well in keeping lower levels of economic/financial inequality vs the outside world. However, when it comes to the breakdown of citizens’ profiles domestically, it is at this point when a particular form of inequality reveals itself, as a growing gap between wealth levels handled by locals vs high-income / asset-owning individuals (many of whom are immigrants), which has gradually developed. Recent bursts in real-estate development and inflationary booms can be accredited, to a great extent, to the late increase of foreign inflows. In 2023, 44.3% of total property sales contracts comprised of overseas buyers. Nevertheless, in order to be in position to anticipate the future effects and possible duration of this problem, we need to investigate the bigger picture and trends, starting from the issues arising in Europe in recent years.

The Problem appears in European Markets in general:

As demonstrated in the diagram below, Cyprus recorded a 3.2% increase in property prices between 2nd quarter 2022 and 2nd quarter 2023, although it is not found in the top segment of this list (there are more countries). But the problem in recent years is not limited to Cyprus. Sources and statistics from the passing Year 2023 suggest a phenomenon of stagnation in prices across European immovable property and real-estate markets, with consistently high property prices in a number of countries not necessarily matched with the corresponding Economic Growth levels to support them (causing signs of stagflation*). Rental prices have recorded an even more rapid increase. The limited access of populations to financing due to the consistently high levels of interest rates by the ECB (high cost of money) in the Eurozone, as well as increased bureaucracy and strict criteria in banking procedures, provide additional obstacles to the equation, which consequently burden the living standards of populations. This challenge is different in nature than the problems faced during the 2008 global financial crisis, where liquidity issues in economies were the greatest drawback (Idealista, 2023).

*Signs of Stagflation: the economic state when, despite the inflation rate being high or increasing, the economic growth rate slows down.


Percentage change on previous year of residential property prices in the EU-27 countries (between 2nd quarter 2022 and 2nd quarter 2023 (Source: Statista))

Outlook for Cyprus – 2024:

The good news is that, as inflation in the Eurozone is now moving closer to the 2% target of the ECB (currently at 2.8%), there should be some response from stakeholders for a gradual cut in interest rates, at least some time soon within the year or the near future, easing the cost of money for the people. At the moment, however, key interest rates on main refinancing operations and the marginal lending and deposit facilities remain unchanged at 4.50%, 4.75% and 4.00% respectively (European Central Bank, 2024). In addition, following the rapid real-estate developments in Cyprus and the economic growth levels recorded in previous years, the start of 2024 has found the country experiencing a deceleration in economic growth, according to a report by the University of Cyprus’ Economic Research Centre (CypERC) (Nicolaou, 2024). Additionally, the European Commission presents a deceleration of economic growth levels from 5.8% (2022) to 2.4% in 2023. The data suggests that the overall property market in Cyprus has reached a high but stable pricing threshold, although a potential future cut in interest rates may kickstart the upward trend once again. The European Commission forecast for economic growth in Cyprus in 2024 is 2.8%.

Moreover, one of the anticipated changes in 2024 is an increase in the supply of properties, fuelled by the general demand and a large portion of projects referring to work in progress from previous years. This increase in supply of properties may assist in stabilising prices further, or even future price drops in a self-applied move by the market to “correct” itself.

Other factors influencing the real-estate growth and ultimately economic growth levels on the island, include of course political stability, the outlook of the nearby war outbreaks in Israel and Ukraine, FDI (Foreign Direct Investment), and the overall strategic planning and performance of the Eurozone region.

Finally, large inflows of foreign working personnel in search for accommodation is another critical factor affecting real-estate prices. According to the Labour Minister, “a total of 110,000 third country nationals currently work legally on the island – and pay into social security, compared to 340,000 Greek Cypriots”. That is approximately one quarter of the country’s total working population (Damaskinos, 2023).

So, how does this general consensus affect inequality?

As demonstrated in the diagram on the following page, 33.5% of the country’s national income in 2022 was shared among the top 10% earners of the country’s population, while 19.9% of the country’s national income was shared among the lowest 50% earners. There were periods where income inequality seems to have been lower (mid 2000s) and periods where it seems to have been higher (early 2010s). It now looks as though income inequality has found a steady but fairly considerable level.

What is more worrying, however, is the fact that 50% of the population are sharing less than 20% of the country’s national income. The average salary in Cyprus today is approximately €2,160 per month, while the median salary is approximately €1,860, following from the above point (Time Doctor, 2024).

Cyprus is a small country and, therefore, not easily falls into a serious recession. At the same time, due to the size of its economy, it is sensitive to economic externalities and distortions. The definition of poverty is for one to be earning 60% or less of a country’s average salary (i.e., less than €1,300 per month for Cyprus). This is not the absolute, but a relative poverty line.


(Source: World Inequality Database)

Thus, specifically because of the status quo of growing income inequality levels, there is a significant section of the population that can now be classified as “poor”. This is a grey mark on the overall image of a country that claims to be proud of the standards of living it offers to its citizens, as well as its overall progress over the last decade.

As mentioned in the above extract, “In Cyprus, economic inequality compares favourably in a European context, but presents a concerning widening trend. It mainly relates to new entrants in the labour market and retirees and has, in part, been boosted by the marked immigration of high-income strata from abroad.” Therefore, the question which remains is, to what extent will any of the above changes and economic events that could take place in the near future cover for recent demographic trends and help contain inequality levels and relative poverty? Most importantly, which set of actions should all relevant stakeholders take towards this effect?

Bibliography:

Charalambous, A., & Pissarides, O. (2023, February). Income Inequality Widens as Crises Hit Poor and Favour the Wealthy. Retrieved from Cyprus Mail: https://cyprus-mail.com/2023/02/26/income-inequality-widens-as-crises-hit-poor-and-favour-the-wealthy/

Damaskinos, I. (2023, September). Cyprus Mail. Retrieved from Cyprus economy would collapse without migrants says minister: https://cyprus-mail.com/2023/09/04/cyprus-economy-would-collapse-without-migrants-says-minister/

European Central Bank. (2024, January). Retrieved from https://www.ecb.europa.eu/press/pr/date/2024/html/ecb.mp240125~f738889bde.en.html

Idealista. (2023, December). Retrieved from European real estate market: forecasts for 2024 sector by sector: https://www.idealista.com/en/news/property-for-sale-in-spain/2023/12/18/160420-european-real-estate-market-forecasts-for-2024-sector-by-sector

Nicolaou, K. (2024, February). Cyprus Mail. Retrieved from Cyprus economic growth slows down in January 2024: https://cyprus-mail.com/2024/02/26/cyprus-economic-growth-slows-down-in-january-2024/

Time Doctor. (2024, March). Retrieved from What is The Average Salary in Cyprus?: https://www.timedoctor.com/blog/average-salary-in-cyprus/

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