Growth in the Cypriot economy is expected to remain resilient despite the shock generated by the conflict in the Middle East, according to the European Commission's Spring Forecast presented on Thursday in Brussels, which nevertheless projects a slowdown in growth to 2.3% in 2026 and 2.7% in 2027.
The Commission report says services exports are expected to remain resilient despite weaker tourism, while for the first time since 2009 the debt-to-GDP ratio fell below the 60% threshold and is continuing on a strong downward trajectory.
According to the report, Cyprus’ real GDP expanded by 3.8% in 2025, supported by robust private consumption and services exports, particularly from booming information and communication technology (ICT) activities and higher tourist arrivals. Investment, excluding ship registrations, also increased as construction activity strengthened.
The report notes that private consumption is expected to remain the main driver of growth in Cyprus, although it is projected to moderate due to rising imported inflation, which is negatively affecting households’ disposable incomes.
At the same time, inflows of foreign workers that had previously supported demand are slowing.
Stronger domestic tourism is expected to partly offset these pressures. Investment, excluding ship registrations, is forecast to decelerate but recover during 2026, as higher costs delay investment decisions despite support from the final year of the Recovery and Resilience Facility (RRF).
The Commission notes that services exports are expected to remain resilient despite weaker tourism, as ICT, financial and business services are not significantly affected by the conflict. By contrast, tourist arrivals are described in the report as "highly sensitive to geopolitical developments", while potential disruptions in global trade could also negatively affect shipping.
Despite the expected trade surplus, profit repatriation by foreign-owned companies continues to weigh on the current account balance, which is forecast to widen in 2026 due to higher oil prices before gradually narrowing in 2027.
On inflation, the Commission forecasts headline inflation to rise to 3.6% in 2026 from 0.8% in 2025, mainly due to the surge in energy prices. However, inflation is expected to ease to 2.2% in 2027 as energy prices gradually normalise.
The government is attempting to contain pressures through reductions in VAT and excise duties on energy products. The report also estimates that weaker tourism prospects will help moderate services inflation, as businesses may adopt more competitive pricing in order to attract tourists.
Regarding the labour market, according to the European Commission conditions remain particularly favourable, with employment forecast to grow by 1.3% in 2026 and by 1.1% in 2027. The unemployment rate is expected to decline further to 4.2%, the lowest level in more than a decade.
The Commission also notes that, following a slowdown in 2026, real wages are expected to rise more rapidly in 2027 as growth strengthens and the automatic cost-of-living adjustment mechanism takes effect. However, wage increases are expected to lead temporarily to faster growth in labour costs relative to productivity.
On public finances, Cyprus continues to record sizeable surpluses. The general government surplus stood at 3.4% of GDP in 2025, compared with 4.1% in 2024, as public expenditure increased faster than revenues.
Expenditure also included the repayment of an EU grant amounting to 0.2% of GDP that had been allocated for the construction of the Vasilikos liquefied natural gas terminal, following irregularities identified in the project.
The budget surplus is projected to narrow to 2.1% of GDP in 2026 and stand at 2.5% in 2027, reflecting a burden of 0.7% of GDP from the tax reform introduced at the beginning of 2026. The reform includes reductions in special tax charges for businesses and personal income tax through adjustments to tax brackets and allowances. At the same time, the corporate tax rate was increased from 12.5% to 15%, while additional pressure on the budget stems from energy support measures, including targeted subsidies and reductions in VAT and excise duties.
Public investment will continue to be supported by Recovery and Resilience Facility funds in 2026, although this support will end from 2027 onwards. Part of the loss is expected to be offset through increased defence spending financed by SAFE programme loans.
Particular emphasis is also placed on the sharp reduction in public debt. According to the forecasts, the debt-to-GDP ratio declined by more than seven percentage points in 2025, reaching 55% and falling below the 60% threshold for the first time since 2009. The downward trend is expected to continue, with public debt projected to fall to 50.4% of GDP in 2026 and 45.5% in 2027.
According to the European Commission’s forecast table, private consumption is expected to grow by 2% in 2026 and 2.6% in 2027, while public consumption is forecast to rise by 2.5% and 2% respectively. Fixed investment is projected to increase by 2.9% in 2026 and 3.2% in 2027. Exports of goods and services are forecast to rise by 1.2% in 2026 and 3.1% in 2027, while imports are expected to increase by 1.3% and 3% respectively.
CNA/EK/EPH/2026
ENDS, CYPRUS NEWS AGENCY
