The Central Bank of Cyprus (CBC) has revised its economic projections upward in its September 2026 forecast, raising its gross domestic product (GDP) growth estimate for 2026 by 0.4 percentage points compared to its June estimates. GDP expansion is now projected to hit 2.9% in 2026 before accelerating to 3.1% in both 2027 and 2028.
Despite ongoing Middle East regional conflict and broader geopolitical instability, the central bank highlighted the underlying resilience of the Cypriot economy. The baseline projection operates under the premise that regional tensions will persist through the final quarter of 2026 before gradually de-escalating.
Economic Baseline & Outlook (2026–2028)
| Macroeconomic Indicator | 2025 (Actual) | 2026 (Projected) | 2027 (Projected) | 2028 (Projected) |
| GDP Growth Rate | 3.8% | 2.9% (revised +0.4%) | 3.1% (revised +0.2%) | 3.1% |
| Unemployment Rate | — | 3.8% (revised -0.8%) | 3.8% (revised -0.7%) | 3.8% (revised -0.7%) |
| HICP Inflation | 0.8% | 3.3% (revised +0.1%) | 2.4% (revised +0.4%) | 1.9% |
| Core Inflation | 1.9% | 2.8% (revised +0.4%) | 2.2% (no change) | 1.9% |
Drivers of Growth and External Challenges
Domestic Demand & Strategic Investments
Strong household real disposable income and steady employment gains continue to anchor private consumption. Furthermore, large-scale residential and non-residential development projects are providing substantial support to domestic activity. The CBC noted that due to their long-term completion horizons, these major investment initiatives are expected to weather temporary regional shocks without cancellation.
Additional growth momentum in 2027 will stem from expanded public investments, notably increased defense spending under the European SAFE program involving domestic firms.
Foreign Trade & Tourism Pressure
Net exports are expected to drag on 2026 economic growth due to lower tourism revenues in the first half of the year caused by regional conflict, alongside rising import volumes needed to support domestic consumption. However, net trade is projected to return to a positive growth contribution across 2027 and 2028 as tourism rebounds.
Labor Market Dynamics
The Cypriot job market continues to exhibit historical strength. Unemployment is forecast to drop to 3.8% in 2026—a downward revision of 0.8 percentage points from June estimates—and hold steady at 3.8% through 2027 and 2028. According to the CBC, these record-low jobless rates demonstrate the expanding productive capacity and tight conditions of the national labor market.
Inflation Trends and Downside Risk Factors
Driven by high international oil prices, elevated refining margins (crack spreads), and rising services costs, HICP inflation is projected to surge to 3.3% in 2026 (up from 0.8% in 2025). High food prices driven by energy overheads also contribute to elevated headline figures, though falling prices for non-energy industrial goods—aided by cheap imports from China and increased e-commerce adoption—help offset broader pressures. Inflation is expected to moderate to 2.4% in 2027 and 1.9% in 2028, with the latter figure factoring in the implementation of the EU’s ETS2 emissions trading system.
Summary of Key Risks
The CBC notes that overall economic risks remain tilted downward for GDP and upward for inflation:
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Potential re-escalation of regional conflicts leading to supply chain disruptions and higher import/energy prices.
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Climate-related extreme weather events and green tax implementation.
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Potential wage and profit margin pressures, alongside financial commitments under upcoming national pension reforms.
Source: Stockwatch.com.cy