Cyprus’s economy grew by 3.3% year on year in the second quarter of 2026, accelerating from 3.0% in the previous quarter. Private consumption and investment were the main drivers, giving Cyprus the euro area’s fourth-fastest growth rate, according to Eurobank Research.

The expansion came despite a more challenging international environment following the outbreak of the US-Iran war. Early indicators point to continued momentum in the third quarter, although renewed inflation, weaker tourist arrivals and geopolitical uncertainty pose risks to the outlook.

Follow THE FUTURE on LinkedIn, Facebook, Instagram, X and Telegram

Investment And Consumer Spending Drive Growth

Private consumption increased by 5.4% year on year, while gross fixed capital formation rose by 9.4%. The investment surge was largely driven by a 151.9% increase in transport equipment, while residential investment grew by a more moderate 4.3%.

Household spending continued to benefit from a resilient labour market. Unemployment stood at 3.6% in the second quarter, close to the lowest levels recorded for this period of the year. Hourly wages rose by 3.9%, marking their strongest increase in five quarters, while consumer credit expanded by 12.0% year on year.

Public consumption also supported growth, rising by 4.5%. Exports increased by 9.6%, largely due to services, but imports grew faster at 12.9%, reflecting increased purchases of transport equipment. As a result, the external surplus narrowed by 45.1%, and net exports detracted from GDP growth.

Stronger activity in wholesale and retail trade, information and communications technology, financial and insurance services, and construction also contributed to the acceleration.

Property Market Signals Continued Investment

Early third-quarter data suggest that investment activity has remained strong despite geopolitical tensions in the Persian Gulf. Property sales rose by 10.7% year on year in July and August, bringing growth for the first eight months of 2026 to 13.7%. The market is on course for a new annual record.

Residential property prices increased by 8.5% year on year in the second quarter, taking the relevant index to a new high. Non-resident buyers accounted for 59% of the increase in property sales between January and August.

Construction activity is also expected to remain robust. The total area covered by building permits rose by 43.1% year on year between January and May. Investment in transport equipment and intellectual property products is expected to provide further support to fixed capital formation during the rest of 2026, partly reflecting favourable base effects.

Tourism Holds Up Despite Geopolitical Uncertainty

Tourism has proved more resilient than initially expected. Arrivals fell by 28.6% year on year in March and April, but the decline eased to 1.7% in June and 1.1% in July before widening to 3.3% in August.

Overall, tourist arrivals were down 7.0% year on year between January and August. This remains broadly within the 4.7% to 5.8% full-year decline projected by Cyprus Insights in September. Under those forecasts, tourism activity would remain above 2024 levels despite the difficult geopolitical backdrop.

Real estate and intellectual property services are also expected to support export growth.

Inflation Puts Pressure On Household Spending

The consumer outlook remains mixed. Headline inflation accelerated to 5.2% year on year in August, up from 4.4% in July, primarily due to higher energy prices. This increase came despite existing support measures and raises questions about inflation as those measures are gradually withdrawn.

Labour-market conditions remain broadly supportive of domestic demand. Although registered unemployment was 9.4% higher year on year in the second quarter, the unemployment rate fell compared with the previous quarter, even as the labour force expanded by 1.6%.

Non-permanent residents accounted for 65.1% of that increase, highlighting Cyprus’s continued reliance on workers from abroad. The inflow comes as employers face labour shortages, reflected in a job-vacancy rate of 2.6% in the second quarter.

There are also early signs of improvement: the annual increase in registered unemployment slowed to 6.5% in July and August.

Credit Rating Upgrade Reflects Stronger Fundamentals

Cyprus’s economic outlook has received a further boost from S&P Global Ratings, which upgraded the country’s sovereign rating to A from A- and assigned a positive outlook. The agency cited continued declines in external and government debt, supported by robust real economic growth.

The second-quarter figures highlight Cyprus’s capacity to expand amid external uncertainty. Sustaining that momentum will depend on the strength of domestic demand, tourism performance and the extent to which energy-driven inflation and geopolitical risks affect households and businesses.