The Central Bank of Cyprus (CBC) has revised its GDP growth forecast for 2024, increasing it by 0.2 percentage points to 3.7%. This adjustment reflects stronger domestic demand, with private consumption playing a pivotal role, supported by the continued resilience of the Cypriot economy.
However, forecasts for 2025-2026 have been slightly downgraded due to the impact of rising imports needed to meet elevated domestic demand. While exports, particularly non-tourism services, remain a growth driver, they are not sufficient to fully offset the increase in imports.
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Labor Market Nearing Full Employment
The labor market in Cyprus continues to strengthen, with unemployment expected to fall to 5% in 2024, down from 5.8% in 2023. This trend is forecast to continue, with unemployment rates projected to drop to 4.9% in 2025, 4.7% in 2026, and 4.6% in 2027, approaching conditions of full employment.
The improved GDP outlook has led to a downward revision of the 2024 unemployment forecast by 0.1 percentage points. The sustained growth momentum of the economy is seen as the key factor driving this positive trend.
Inflation Stabilizing Towards Target Levels
Inflation, as measured by the Harmonized Consumer Price Index (HICP), is expected to decline to 2.2% in 2024 from 3.9% in 2023, moving closer to the medium-term target of 2%. This stabilization is attributed to easing external inflationary pressures, including a reduction in energy and raw material prices, as well as the lagged effects of eurozone monetary policy, which continues to temper inflation.
Wage growth is anticipated to remain moderate, helping to limit inflationary pressures. However, the gradual introduction of a green carbon tax from 2025 may result in modest fuel price increases.
The normalization of inflation for industrial goods (excluding energy) is also expected between 2025 and 2027, following the high levels seen in 2022-2023. Core inflation—excluding energy and food—is forecast to decline from 3.8% in 2023 to 2.6% in 2024, 2.0% in 2025, 1.9% in 2026, and 2.0% in 2027. Service price inflation is expected to decelerate during the 2025-2027 period.
The 2024 inflation forecast was revised upward by 0.1 percentage points compared to September 2024 projections, reflecting higher-than-expected service price inflation.
Risks And Prospects
The economic outlook for 2024 is balanced, while projections for 2025-2027 suggest a slight increase in downside risks.
Key downside risks include ongoing geopolitical tensions and weaker-than-expected external demand amid heightened global trade uncertainty. Domestically, the introduction of new taxes on multinational corporate profits could negatively impact economic performance, although the extent of this effect is uncertain. Slower-than-expected easing of financing conditions may also curb domestic demand.
On the upside, stronger-than-anticipated private consumption, driven by lower household savings rates, could boost economic performance.
Inflation risks for 2024 are balanced, while those for 2025-2027 lean slightly upward. Upside risks include potential geopolitical escalations, trade policy uncertainties (such as new US tariffs and EU retaliatory measures), and climate-related impacts like extreme weather events and the implementation of green taxation. Wage growth exceeding expectations and higher corporate profit margins could also contribute to inflationary pressures.
Conversely, inflation could underperform baseline projections if financing conditions ease more slowly than expected or if heightened geopolitical tensions unexpectedly weaken the global economic environment.
