The Central Bank of Cyprus (CBC) has slightly adjusted its outlook for the country’s economic performance in 2025, projecting a marginally lower growth rate alongside a more subdued inflation forecast. In its latest update released Friday, the CBC estimates GDP growth for 2025 at 3.1%, slightly down from the 3.2% forecast issued in March. Meanwhile, inflation is now expected to drop significantly to 1.5%, compared to the previous estimate of 2.1%.
The revised figures were compiled before the recent escalation in hostilities between Israel and Iran, which are not reflected in the current projections.
Economic Growth Drivers and Outlook
While the forecast indicates a slight moderation in economic momentum—down from 3.4% in 2024—growth between 2026 and 2027 is expected to hold steady at 3% annually. This trajectory is primarily attributed to robust domestic demand, driven by rising household purchasing power and a stable labour market.
Investment activity, especially in non-residential infrastructure and green or digital transition projects under the EU Recovery and Resilience Plan, is also expected to play a key role in supporting growth. Though private consumption growth is anticipated to gradually normalise, it remains a major contributor to the economy.
On the external side, growth will likely benefit from the continued expansion of technology services, particularly those tied to intellectual property, as well as financial and professional services. The shipping industry and tourism are expected to make positive, albeit more modest, contributions. However, the temporary closure of Middle Eastern airspace is cited as a potential drag on tourism.
Compared to previous estimates, GDP growth for both 2025 and 2026 has been revised downward by 0.1 percentage points, mainly due to weaker expected external demand amid ongoing global geopolitical and trade tensions.
Labour Market Remains Solid
Cyprus’s labour market continues to show resilience, with the unemployment rate expected to fall to 4.7% in 2025—down from 4.9% in 2024. This rate is forecast to remain stable through 2026 and 2027, which would bring the country close to conditions of full employment.
Unemployment projections for 2026 and 2027 have been nudged up by 0.1 percentage points compared to the March forecast, mirroring the slightly lowered GDP growth expectations.
Inflation Outlook Adjusted Downward
Inflation, as measured by the Harmonised Index of Consumer Prices (HICP), is forecast to decrease significantly to 1.5% in 2025 from 2.3% in 2024. The decline is largely driven by lower energy prices observed before the Israel-Iran conflict. Inflation is expected to rise modestly to 2% in 2026 and 2.4% in 2027 due to increasing energy and food costs and reduced downward pressure from service prices.
Lower wage growth projections and the impact of existing monetary policy measures are also contributing to the subdued inflation outlook.
The CBC has revised its inflation forecast for 2025 downward by 0.6 percentage points and by 0.1 points for 2026. This adjustment reflects lower-than-expected energy prices and the implementation of electricity subsidies through March 2026.
Core inflation (excluding energy and food) is also expected to ease—from 2.6% in 2024 to 2.1% in 2025 and further down to 1.9% by 2027. The revision is tied to muted industrial goods price trends and a stronger euro, which helps contain import costs.
Risks and Opportunities
According to the CBC, risks to economic growth in the 2025–2027 period remain tilted to the downside. These include potential shocks from rising energy prices due to geopolitical instability, disruptions in tourism, and prolonged uncertainty in global trade policies.
On the upside, stronger impacts from anticipated tax reforms, rising wages amid a tight labour market, and robust corporate earnings could provide more momentum than expected.
As for inflation, the main risks are skewed upwards, particularly if geopolitical conflicts intensify and energy prices surge. Additional inflationary pressures could also stem from larger-than-expected wage increases or tax reforms that fuel consumer spending.
Source: Stockwatch.com.cy