Cyprus’ economy faces the fallout of the conflict in the Middle East on a strong footing, but its impact may be felt via higher inflation and uncertainty in the short term. Headline inflation is projected to rise to 3.6% in 2026 and then ease to 2.2%, reflecting first the surge and then the gradual normalisation of energy prices. Household consumption growth is expected to ease as inflation erodes real disposable incomes, but wage adjustment through automatic indexation is likely to provide support. Tourism exports will be negatively affected by the conflict, but other service exports are expected to remain resilient. Fiscal surpluses prevail despite the financing of a tax reform and measures to tackle energy price hikes. The debt-to-GDP ratio fell below the 60% threshold by end-2025 and continues its pronounced downward trend.
| Indicators | 2025 | 2026 | 2027 |
|---|---|---|---|
| GDP growth (%, yoy) | 3.8 | 2.3 | 2.7 |
| Inflation (%, yoy) | 0.8 | 3.6 | 2.2 |
| Unemployment (%) | 4.4 | 4.2 | 4.2 |
| General government balance (% of GDP) | 3.4 | 2.1 | 2.5 |
| Gross public debt (% of GDP) | 55.0 | 50.4 | 45.5 |
| Current account balance (% of GDP) | -6.4 | -7.2 | -6.5 |
Growth expected to remain resilient despite the shock generated by the Middle East conflict
Real GDP expanded by 3.8% in 2025, supported by robust private consumption and services exports, particularly from booming ICT activities and higher tourist arrivals. Investment excluding ship registrations also grew, as construction activity gained momentum.
Real GDP is projected to grow by 2.3% in 2026 and 2.7% in 2027. This outlook reflects the positive conditions that were in place before the Middle East conflict started. Private consumption will remain the main driver of growth, although it is set to moderate as rising imported inflation weighs on disposable incomes and the inflows of foreign workers which previously supported household spending moderate. Domestic tourism is expected to strengthen in 2026, partially offsetting these effects.
Investment excluding ships is projected to decelerate but recover in the course of 2026, as rising costs delay investment decisions despite support from the final year of RRF. Services exports in total are set to withstand weaker tourism exports in 2026, as robust ICT, financial and business service exports are largely unaffected by the conflict. Tourism arrivals remain highly sensitive to geopolitical developments. Global trade disruptions could weigh on the outlook for the shipping sector. Despite the projected trade surplus, the repatriation of profits by foreign-owned corporates continues to weigh on the current account deficit, which will be widened by the oil price shock in 2026, before gradually narrowing in 2027.
Energy price surge to propel inflation
Headline inflation is projected to rise to 3.6% in 2026 before easing to 2.2% in 2027. The surge in oil prices has sparked a rise in energy costs, although reductions in VAT and excise duty on energy may help to contain further energy price spikes. A weaker tourism outlook is set to moderate services inflation as firms could offer more competitive pricing to attract inbound tourists.
After taking a hit in 2026, real wage growth is projected to accelerate in 2027 as GDP growth picks up and salaries adjust through the automatic cost-of-living adjustment mechanism. Higher wages will push labour cost growth above labour productivity temporarily. Taken together, stable household spending over the forecast horizon will lead to a modest rise in the household saving rate in 2026, followed by a more pronounced increase in 2027 as growth strengthens.
Labour market remains solid
Labour market conditions are expected to remain robust, supported by strong job creation. Employment is expected to grow by 1.3% y-o-y in 2026 and 1.1% in 2027. Over the same period, the unemployment rate is forecast to fall to 4.2%, the lowest in over a decade.
Healthy public finances allow for a general tax reform and measures to contain energy prices
In 2025, Cyprus continued to experience a sizeable surplus in its general government headline balance, reaching 3.4% of GDP, down from 4.1% of GDP in 2024, with expenditure growing more strongly than revenue. Expenditure includes the repayment of an EU grant of 0.2% of GDP, originally received for the construction of the Vasilikos liquified natural gas terminal, due to irregularities.
The budget surplus is projected to ease to 2.1% of GDP in 2026 and 2.5% in 2027, reflecting a 0.7% of GDP burden due to the general tax reform that took effect at the beginning of 2026. This tax reform mainly lowers some special tax payments for companies and the personal income tax for citizens via an adjustment of tax brackets and allowances. Partly offsetting this, the corporate tax rate was increased from 12.5% to 15%. Moreover, several measures by the government to counter the rising energy prices, such as targeted subsidies as well as reductions in VAT and excise duties, weigh on the budget.
Public investment is supported by RRF funds in 2026 whreas the RRF will no longer provide this support from 2027. However, this will be partially compensated by additional defence spending financed from SAFE (Security Action for Europe) loans.
The government debt-to-GDP ratio dropped by more than 7 pps. in 2025, to 55.0% by the end of the year, falling below the 60% threshold for the first time since 2009. Thanks to high nominal GDP growth, this trend is projected to continue with the debt ratio set to decrease to 50.4% of GDP in 2026 and 45.5% of GDP in 2027.