The Central Bank of Cyprus (CBC) has revised slightly downward its forecast for economic growth in 2025, projecting a GDP increase of 3.1% compared to 3.2% in March. At the same time, inflation expectations have been significantly lowered to 1.5%, from 2.1% previously.
In a press release on Friday, the CBC noted that the baseline forecasts were completed before the recent military clashes between Israel and Iran and therefore do not account for any related economic repercussions.
Specifically, the GDP growth rate for 2025 is expected to reach 3.1%, compared to 3.4% in 2024, while during the period 2026–27, the GDP is projected to grow by 3% annually.
This trajectory is mainly driven by continued domestic demand, supported by rising real household disposable income and a resilient labour market. External demand is expected to contribute to a lesser extent, affected by heightened global geopolitical and trade uncertainty.
Private consumption, although expected to normalise in growth over the coming years, remains a key driver of economic expansion. Significant support is also expected from major ongoing non-residential private investments, infrastructure projects linked to digital and green development, and reforms under the Recovery and Resilience Plan.
Any remaining negative effects on domestic demand from previous ECB interest rate hikes are expected to fully dissipate by the end of 2025.
Despite persistent trade policy shifts in the US and global uncertainty, the CBC does not foresee significant negative impacts on investment or private consumption, due to Cyprus's limited goods trade with the US.
Net exports are expected to benefit significantly from technology-related services, particularly those involving the use of intellectual property. To a lesser extent, growth is also expected from financial and professional services—due to market diversification—as well as continued positive contributions from the shipping sector and the ongoing recovery in tourism. Still, the recent closure of Middle Eastern airspace is seen as a downside risk for tourism.
Compared to March 2025 forecasts, GDP growth has been revised downward by 0.1 percentage points annually for 2025 and 2026, mainly due to weaker expected external demand linked to heightened uncertainty.
Labour market remains resilient
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The labour market continues to demonstrate resilience, supporting economic performance. The unemployment rate is expected to fall to 4.7% in 2025 from 4.9% in 2024, consistent with positive employment expectations recorded in the European Commission’s Economic Sentiment Surveys and a steady decline in registered unemployed.
Given the projected economic expansion, unemployment is expected to stabilise at around 4.7% in 2026–2027—approaching full employment conditions. Compared to March, unemployment forecasts have been slightly revised upward by 0.1 percentage points for 2026 and 2027, reflecting the lower GDP growth projection due to a weaker external environment.
Inflation to decline sharply in 2025
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Inflation, measured by the Harmonised Index of Consumer Prices (HICP), is forecast to fall to 1.5% in 2025 from 2.3% in 2024, before rising again to 2% in 2026 and 2.4% in 2027. The sharp drop in 2025 is mainly attributed to falling energy prices, as observed before the escalation of conflict between Iran and Israel.
Inflation is also being subdued by the effects of monetary policy, and further moderated by expectations of slower wage growth in 2025–2027 compared to 2024. The anticipated increase in inflation in 2026–2027 is mainly due to higher projected energy and food prices, and a slowdown in service price deceleration.
Services inflation is expected to ease further due to softening domestic demand and reduced wage pressures. However, from 2027, energy inflation is likely to rise due to the implementation of the EU’s extended Emissions Trading System (ETS2) and a new carbon tax.
Compared to March 2025 forecasts, inflation has been revised downward by 0.6 and 0.1 percentage points in 2025 and 2026, respectively, largely due to lower energy prices, expected oil price developments, and a government subsidy on electricity costs (April 2025–March 2026).
Core inflation (excluding energy and food) is projected to decline from 2.6% in 2024 to 2.1% in 2025, and to 1.9% in 2026–2027. The forecast reflects subdued industrial goods prices and a stronger euro, which lowers import costs.
Core inflation has been revised slightly downward (by 0.1 percentage points annually for 2025–2027), due to lower forecasts for industrial goods inflation excluding energy.
The CBC notes that risks to GDP growth in the 2025–2027 period are skewed to the downside. These include potential energy price surges if the Israel-Iran conflict escalates, and negative impacts on tourism. External demand may also be hit by persistent global trade policy uncertainty.
Upside risks to GDP include stronger-than-expected impacts from a forthcoming tax reform on private consumption, higher wage growth in a near-full employment environment, and stronger-than-expected corporate profit margins.
As for inflation, risks are tilted to the upside. Key concerns include potential energy price spikes due to geopolitical tensions. While a slowdown in global trade, an end to the Ukraine war, or higher oil production could have a dampening effect, these are seen as less dominant. Additional inflationary pressures could come from stronger-than-expected wage hikes, positive effects from tax reform on consumption, and higher business markups.
CNA/TNE/EPH/2025
ENDS, CYPRUS NEWS AGENCY
