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.
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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.
