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Cyprus Growth Outlook Darkens As Middle East Conflict Drives Up Energy Costs And Inflation

Cyprus’ economy is expected to grow 2.9% in 2026, down from 3.8% in 2025, as the Middle East conflict disrupts energy markets, tourism and investment.

In its September forecasts, the Central Bank of Cyprus projected growth would recover to 3.1% in both 2027 and 2028. The baseline assumes the conflict continues until the final quarter of 2026, followed by a gradual easing of tensions.

Energy And Tourism Weigh On Growth

Higher oil prices, wider refining margins and geopolitical uncertainty are expected to raise energy costs, reduce tourism receipts and weaken non-residential private investment.

Domestic demand should provide a cushion. Private consumption is expected to remain positive as real disposable incomes rise, while the labor market and major residential and non-residential projects should support activity.

Net exports are forecast to weigh on growth in 2026 as tourism revenue declined in the first half of the year. Their contribution is expected to turn positive again in 2027 and 2028 as tourism recovers.

CBC Raises Growth And Cuts Unemployment Forecasts

The CBC raised its 2026 growth forecast by 0.4 percentage points and its 2027 estimate by 0.2 percentage points from June. Stronger-than-expected second-quarter activity, improved tourism performance and residential investment supported the revisions.

Unemployment is now forecast at 3.8% in 2026, remaining at that level through 2028. The CBC cut its unemployment forecasts by 0.8 percentage points for 2026 and 0.7 percentage points for both 2027 and 2028, citing stronger economic performance and a lower-than-expected rate in the first half.

Inflation Forecast Rises To 3.3%

The Harmonised Index of Consumer Prices is expected to rise to 3.3% in 2026, from 0.8% in 2025, mainly because of higher energy prices and refining margins linked to the Middle East conflict.

Services and food prices are also expected to increase as higher energy and operating costs pass through the economy. Non-energy industrial goods are forecast to remain in deflation, partly due to lower import prices from China and increased online shopping.

Government measures, including lower VAT on electricity and extended reduced fuel excise duties, are included in the forecasts.

Inflation is projected to ease to 2.4% in 2027 and 1.9% in 2028. The 2028 outlook also assumes the introduction of the EU’s expanded Emissions Trading System, ETS2, which is expected to affect transport fuel prices.

Core Inflation Remains Elevated

Core inflation is forecast to rise to 2.8% in 2026 from 1.9% in 2025, driven mainly by stronger services inflation and indirect energy effects.

It is expected to moderate to 2.2% in 2027 and 1.9% in 2028. The CBC raised its 2026 core inflation forecast by 0.4 percentage points from June, while leaving its 2027 and 2028 forecasts unchanged.

Risks Remain Tilted Toward Weaker Growth

The CBC said risks for 2026-2028 remain tilted toward weaker growth and higher inflation. A renewed escalation of tensions in Iran could push energy and import prices higher, particularly if supply chains are disrupted.

Climate-related shocks, stronger wage growth, wider profit margins and the impact of pension increases linked to upcoming reform were also identified as risks.

More Than 1.5 Billion People Faced Dangerous Heat This Summer

More than 1.5 billion people were exposed to dangerous levels of heat this summer, according to a global analysis by nonprofit Climate Central.

The study found that Europe experienced the most unusual heat during June-August 2026, with nearly nine in 10 Europeans exposed to at least one month of what researchers classify as “risky heat.”

Europe Emerged As The World’s Hottest Region

Climate Central defines risky heat as temperatures above 90% of local temperatures recorded between 1991 and 2020 for the same period. Researchers use the threshold to identify temperatures at which health risks begin to increase.

Across the world, people in 203 countries experienced at least 30 days of risky heat. In 54 countries, June-August 2026 was the hottest such period on record, while seven of the 10 countries with the largest temperature anomalies were in Europe.

France recorded the largest national temperature anomaly, at 3.5C above its historical average.

“Whether it’s nine in 10 Europeans enduring risky heat, hundreds of millions impacted across Asia and Africa, or relentless record-breaking temperatures in North America, human-driven warming is pushing communities beyond safe physical limits,” said Kristina Dahl of Climate Central.

She said the summer’s heat should be viewed in terms of its immediate effects on health systems, labor productivity, infrastructure and household finances.

Simon Stiell, executive secretary of the United Nations Framework Convention on Climate Change (UNFCCC), who was not involved in the study, said the findings show the rising costs of climate change linked to fossil fuel use.

Clean Energy Faces Rising Demand

Europe’s extreme summer was part of a broader trend that scientists say would have been “virtually impossible” without climate change. Earlier this month, the United Nations said limiting warming to 1.5C is no longer achievable under current conditions.

The latest United Nations Environment Programme (UNEP) outlook projects 1.8C of warming in the best-case scenario and more than 2C in less favorable cases. UNEP now describes the likely pathway as “overshoot, peak and decline.”

Renewable energy is central to limiting that overshoot. Renewables generated almost 34% of global electricity in 2025, but UNEP says the share would need to reach 60%-70% by 2030 under a limited-overshoot pathway.

In the European Union, wind and solar generated more electricity than fossil fuels for the first time last year. SolarPower Europe estimates that solar generation has saved the bloc €33.8 billion in avoided gas imports since the start of the war on Iran.

Power Grids Struggle With Growing Demand

Investment in clean energy has reached about $1.9 trillion annually, but renewable generation is meeting only around 40% of the increase in electricity demand. Air conditioning and the rapid expansion of artificial intelligence are contributing to that growth.

According to the International Energy Agency, data center electricity use increased 17% in 2025, reaching roughly 1.5%-2% of global electricity demand. That figure is expected to double by 2030.

Europe’s aging power grids are also struggling to integrate growing amounts of renewable generation, leaving some solar and wind capacity unused. Battery storage can help reduce those bottlenecks, but investment has not kept pace with the scale of the challenge.

This summer’s heat is adding pressure on governments, businesses and infrastructure systems to adapt to higher temperatures while expanding low-carbon energy capacity.

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