Cyprus’s economic growth remains robust, driven primarily by domestic demand. Household consumption is expected to gradually ease as real wage growth slows, but investment is set to be stronger, supported by the completion of RRF projects in 2026. Services exports are also set to remain strong. Headline inflation has been decreasing throughout 2025 and is projected to approach 2% by the end of the forecast horizon, whereas headline inflation excluding energy and food will remain slightly higher. Government fiscal surpluses are projected to hold up and the debt-to-GDP ratio is set to continue its downward trend and move below 50% of GDP in 2027.
| Indicators | 2025 | 2026 | 2027 |
|---|---|---|---|
| GDP growth (%, yoy) | 3.4 | 2.6 | 2.4 |
| Inflation (%, yoy) | 0.9 | 1.5 | 1.9 |
| Unemployment (%) | 4.7 | 4.5 | 4.3 |
| General government balance (% of GDP) | 3.3 | 3.0 | 3.2 |
| Gross public debt (% of GDP) | 56.4 | 51.0 | 45.7 |
| Current account balance (% of GDP) | -7.7 | -7.4 | -6.9 |
Growth remains sustained
Real GDP expanded by 3.2% in the first half of the year, driven by robust aggregate consumption (up 6.2% y-o-y) and accelerating investment (up 18.4% y-o-y). Net exports also had a positive impact on growth due to strong ICT trade and record-breaking tourist arrivals early in the season.
The economic momentum is set to remain strong over the second half of 2025, leading to GDP growth of 3.4% for the entire year. The GDP growth rate is projected to moderate to 2.6% in 2026 and 2.4% in 2027. Private consumption is expected to remain the main driver of growth, though its momentum is set to ease as real income growth moderates, and the inflow of foreign workers whose relocation typically supports household spending, slows. This moderation is expected to be partially offset by stronger investment, supported by the timely implementation of the RRF by 2026, and sustained inflows of inward FDI, especially in real estate activities. Exports are also set to remain strong throughout the forecast horizon thanks to a solid tourist outlook and buoyant ICT activity. However, the global trade slowdown is having a negative impact on the outlook for the shipping sector, particularly in 2026. Despite a sizeable trade surplus driven by services, the current account remains in deficit due to profit repatriation by the large number of foreign-owned corporates. The current account deficit is projected to narrow only gradually by 2027.
Inflation to stay slightly below 2% in the medium term
Headline inflation decreased sharply over the course of 2025, driven mainly by lower energy prices and, to a lesser extent, by moderating food prices. This decrease reflects the impact that a temporary VAT reduction had on energy bills. Headline inflation is projected to fall to 0.9% in 2025, before gradually rising to 1.9% by 2027, as the impact of the VAT reduction fades and the introduction of ETS2 in 2027, if not delayed, is going to lift energy inflation. Headline inflation excluding energy and food is set to remain slightly higher due to persistent service price pressures linked to strong tourism demand.
Record-low unemployment
Labour market conditions are set to remain strong, in line with the growth outlook. Job creation levels are solid, with employment expanding by 1.6% y-o-y in the first half of 2025. Unemployment fell to a record low of 4.3% over the same period. Employment growth has been supported by significant inflows of foreign workers. However, these inflows are expected to gradually moderate as the initial wave of corporate relocations under the so-called ‘headquartering policies’, designed to attract international companies to Cyprus, is coming to an end.
Public finances remain in good shape
In 2024, Cyprus achieved a sizeable surplus in its general government headline of 4.1% of GDP, with revenue growing more strongly than expenditure. In 2025, the government surplus is projected to remain solid, slightly decreasing to 3.3% of GDP.
Favourable economic growth and labour market conditions continue to support strong revenue growth. This is despite higher spending on support measures and compensation payments following the wildfires in July 2025, as well as VAT reductions for energy and other basic goods. With the RRF entering its final phase, public investment is projected to benefit from a noticeable boost in 2025 and 2026.
In 2026 and 2027, public finances are forecast to remain favourable, and the government headline surplus is projected to hold up, at 3.0% and 3.2% of GDP respectively. The end of the RRF in 2026 is expected to have a dampening effect on government revenue and expenditure in 2027.
The government debt-to-GDP ratio dropped by more than 8 pps. to 62.8% at the end of 2024. This trend is projected to continue with the debt level projected to fall to 56.4% of GDP by the end of 2025. Government debt is projected to further decrease to 51.0% of GDP in 2026 and 45.7% of GDP in 2027.