The Cypriot economy grew 3.0% year on year in the first quarter of 2026, marking its slowest pace in 10 quarters as a rebound in imports reduced the contribution from net exports. Domestic demand, however, remained resilient, supported by stronger private consumption, low unemployment and continued strength in residential investment.

Imports Dampen First-Quarter Growth

According to Eurobank Research, GDP growth eased from 4.3% in the fourth quarter of 2025 and 3.6% in the first quarter of the previous year.

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The slowdown was driven primarily by a weaker contribution from net exports. Although exports and imports both recorded strong annual growth of 10.5% and 10.4%, respectively, imports rebounded sharply after an unusually weak period a year earlier, particularly in transport equipment such as ships and aircraft. As a result, external trade contributed less to overall economic growth.

Domestic Demand Remains The Main Engine

Domestic demand continued to underpin the economy. Private consumption accelerated to 4.9% year on year from 3.6% in the previous quarter, supported by favourable labour market conditions. Unemployment fell to 4.0%, the lowest first-quarter level on record.

Public consumption also strengthened, while the decline in gross fixed capital formation eased significantly to 6.9% from 21.7% a quarter earlier.

Residential investment remained resilient, expanding 4.7% year on year after a 5.9% increase in the previous quarter, supported by strong growth in housing lending throughout 2025. By contrast, momentum in non-residential construction weakened considerably, while investment in intellectual property products declined sharply for a second consecutive quarter.

Tourism Faces Pressure, But Services Remain Resilient

Looking ahead, Eurobank Research expects Cyprus to remain exposed to geopolitical tensions in the Middle East, although the overall macroeconomic impact should remain limited if regional conditions continue to stabilise following the June 17 ceasefire agreement.

Tourism and transport are likely to experience the greatest pressure. After a record year in 2025 and strong growth at the beginning of 2026, tourist arrivals fell sharply in March and April before the decline eased to 4.9% in May, raising hopes of a gradual recovery during the summer season.

Information and communications technology, financial services and other business services are expected to remain comparatively resilient.

Inflation And Labour Market Pressures Emerge

Some signs of strain are beginning to appear. Registered unemployment rose 9.0% year on year in April and May, reversing the decline recorded during the first quarter. The increase was concentrated in tourism, administrative services and logistics.

Inflation also accelerated, reaching 4.0% in June from 0.9% in February as higher energy costs filtered through to service prices. Government measures aimed at containing imported inflation, together with an increase in wage indexation to 90% from July, are expected to help offset some of those pressures.

Construction Continues To Support Growth

Construction is expected to remain one of the economy’s key growth drivers through the second half of 2026.

Building permits increased 48.8% year on year in January and February, while the total approved building area expanded by 56.5%. Property sales also remained strong during the first four months of the year, supported by continued growth in housing lending.

Momentum softened in May as demand from foreign buyers eased. Even so, overseas purchasers remained the primary driver of market growth during the first five months of the year, accounting for 61% of the increase in property sales.

Labour Shortages Remain The Main Structural Challenge

Despite slower economic growth, Cyprus continues to benefit from strong public finances, improving financing conditions and a business-friendly regulatory and tax environment.

Eurobank Research identifies labour shortages as the country’s main structural constraint. With the job vacancy rate remaining elevated at 2.8% in the first quarter, policies that improve labour mobility and attract skilled foreign workers will be essential to sustaining the Cypriot economy’s medium-term growth potential.