Economic growth is expected to remain strong in 2025 and 2026, thanks to the continuation of dynamic domestic demand. Despite a fragile international environment, exports of services are also set to remain robust. Inflation is expected to decline. The government budget is forecast to register noticeable surpluses, supported by continued strong growth in revenues. The debt-to-GDP ratio continues to decrease and is projected to move below 60% this year.
| Indicators | 2024 | 2025 | 2026 |
|---|---|---|---|
| GDP growth (%, yoy) | 3,4 | 3,0 | 2,5 |
| Inflation (%, yoy) | 2,3 | 2,0 | 2,0 |
| Unemployment (%) | 4,9 | 4,7 | 4,6 |
| General government balance (% of GDP) | 4,3 | 3,5 | 3,4 |
| Gross public debt (% of GDP) | 65,0 | 58,0 | 51,9 |
| Current account balance (% of GDP) | -7,0 | -6,5 | -5,9 |
Robust economic growth to continue
Real GDP grew by 3.4% in 2024, mainly driven by private consumption, which increased by 3.8%. Investment also picked up, growing by 2.5% (excluding ship registrations), despite a slowdown in the fourth quarter linked to a strike in the construction sector. Net exports turned positive, supported by strong surpluses in ICT, tourism and sea transport services.
Growth is set to remain robust at 3% in 2025 and 2.5% in 2026. Private consumption is expected to remain the key driver of growth as household purchasing power continues to increase, in conjunction with solid wage growth and abating inflation. Net exports are also projected to remain strong thanks to services sectors such as tourism and ICT. Investment is set to accelerate, supported by funds from the RRF and the continuation of large construction projects.
The ongoing transformation of the economy is expected to translate into strong investment flows into emerging sectors such as ICT, which also contribute to productivity gains. However, the growing presence of foreign-owned companies, and the resulting repatriation of their profits, is expected to partially offset improvements in the trade balance. Still, the current account deficit is projected to narrow to 5.9% of GDP by 2026.
Economic uncertainty remains the main downside risk. Cyprus’s limited goods trade with the US suggests only marginal direct impact from the recent tariffs. However, indirect negative spillovers resulting from global trade disruptions remain a risk. This is particularly the case given the importance of the sea transport sector for the Cypriot economy, which is more exposed to international trade fluctuations.
Labour market pressures weaken
The unemployment rate fell to a 15-year low of 4.7% in 2024-Q4, without significant signs of unmet labour demand. This is partly due to the inflows of foreign workers following the so-called ‘headquartering policies’, designed to attract international companies and relocate headquarters to Cyprus. These inflows are expected to gradually reduce, as the initial wave of corporate interest has largely materialised. With growth moderating slowly and labour needs diminishing as a result, pressure on the labour market is expected to remain limited.
Inflation to hit 2%.
Food and tourism prices showed marked increases in early 2025, reflecting the delayed passthrough of wage growth and strong tourist demand. These temporary inflationary pressures are expected to gradually subside as wage growth normalises and goods prices, including energy, moderate. HICP inflation is projected to converge to 2% by 2026.
Fiscal outlook remains bright
In 2024, Cyprus reached a general government headline surplus of 4.3% of GDP, with revenues growing stronger than expenditures. In 2025, the government surplus is projected to remain solid and reach 3.5% of GDP. Continued strong economic growth is expected to contribute to revenues growing at a faster pace than expenditures, despite several new or increasing expenditure measures. These include the participation of the State in the construction of a terminal for receiving liquified natural gas and of the Great Sea Interconnector for gas. These also include social initiatives like the solidarity fund to compensate people who lost their savings during the financial crisis of 2012-2013, as well as a mortgage-to-rent scheme that allows overindebted households to stay in their property while transforming their loan into rent payments.
In 2026, the overall picture is forecast to remain broadly unchanged, and the government headline balance is projected to achieve a surplus of 3.4% of GDP.
The government debt-to-GDP ratio dropped by more than 8 pps. down to 65.3% at the end of 2024. This trend is supported by the continued government headline surpluses. Government debt is projected to fall to 58.0% of GDP by the end of 2025 and to 51.9% in 2026. With this fiscal outlook the risks for public finances appear contained.