The Cyprus economy entered 2025 from a position of strength following several years of robust growth, strong fiscal performance and significant improvements in financial stability.
GDP growth reached 3.8% in 2025, among the strongest performances in the Euro Area. Economic growth continued to be supported by a combination of investment, household consumption and services exports. Growth was primarily driven by consumption and net exports, which contributed 2.3% and 2.5% respectively, while investment made a negative contribution of 1.0%, partly offsetting the overall expansion.
Labour market conditions remained favourable, supported by strong demand for labour across construction, tourism, ICT, financial services and professional services. Rising nominal wages, combined with moderating inflation – which declined to 0.8% – contributed to an improvement in real household incomes, consumer confidence and domestic demand. At the same time, Cyprus continued to benefit from a diversified economic structure, reducing its vulnerability to sector-specific shocks.
During 2025, the ECB continued its easing cycle, cutting the Deposit Facility Rate to 2.0% in June and keeping it unchanged for the remainder of the year, while the Federal Reserve resumed rate cuts in September and delivered three consecutive 25 basis point reductions, lowering the federal funds target range to 3.50%-3.75% by December 2025. As a result, monetary policy became less restrictive in both the Euro Area and the United States, although central banks remained data-dependent given inflation and labour market uncertainties.
The strong start to 2026 was disrupted by the military conflict that began in late February between Israel, the United States and Iran, directly affecting ten countries in the Middle East, including Cyprus through the isolated March 1st event at Akrotiri, and creating an economic shock across the world. The impact of the Middle East conflict on Cyprus operates mainly through indirect but economically significant channels. Rising energy prices and transport costs are weighing on household purchasing power and increasing cost pressures for businesses.
At the same time, tourism and aviation remain exposed to weaker regional sentiment, while shipping and logistics face disruption through higher freight costs, insurance premiums and delivery delays, particularly in connection with risks surrounding the Strait of Hormuz. For a small and open economy such as Cyprus, these external pressures can pass relatively quickly into inflation, confidence and broader business conditions. During the first half of 2026, monetary policy in the Euro Area and the United States reflected cautious, data-dependent decision-making amid renewed inflation risks.
The ECB kept the Deposit Facility Rate at 2.0% in early 2026, before raising it by 25 basis points in June to 2.25%, responding to higher energy prices and geopolitical pressures. Meanwhile, the Federal Reserve maintained the federal funds target range at 3.50%-3.75%, citing resilient activity, a strong labour market and inflation still above target. Overall, monetary conditions remained broadly restrictive, with central banks prioritising price stability amid heightened uncertainty.
Regional conflicts and heightened geopolitical uncertainty have been reflected in the latest forecasts by international institutions. The European Commission revised its growth forecast for Cyprus to 2.3% in its May 2026 publication, down from 2.6% in its November 2025 projections. Similarly, the IMF pointed to some loss of momentum following the exceptionally strong performance recorded in 2025, while highlighting the economy’s increased sensitivity to evolving external conditions. Based on IMF projections, Cyprus is expected to continue outperforming the Euro Area average, with GDP growth projected at 3.0% in 2026. Eurobank Research’s forecast for 2026 stands at 2.3%, lower than the IMF projection and in line with the European Commission’s latest forecast.
Cyprus maintains one of the strongest fiscal positions in the Euro Area, offering an important anchor of economic stability in a volatile external environment. In 2025, the general government balance recorded a surplus of 3.4% of GDP, marking the best performance in the Euro Area for a fourth consecutive year, supported by resilient growth, strong revenues and prudent fiscal management. Accordingly, the public debt fell to 55% of GDP, down 41.5 percentage points in just four years. This performance has been recognised by rating agencies, with S&P and Fitch at A- with positive outlook, Moody’s at A3 Stable and DBRS at A Stable, confirming market confidence in Cyprus’ fiscal discipline and economic resilience.
Looking ahead, Eurobank Research expects the fiscal position to remain strong in 2026, with a budget surplus of around 2.4% of GDP and public debt declining further to approximately 52% of GDP. These developments create valuable fiscal space, support investor confidence, reduce vulnerability to external shocks and strengthen financial stability. Cyprus’ sound public finances remain a key advantage for the economy, supporting sustainable growth and reinforcing confidence among households, businesses and international investors.
Overall, the outlook remains constructive but not risk-free. While the direct economic impact of the latest Middle East tension remains manageable provided that the June 17 ceasefire agreement lasts, related events in the preceding the 3.5-month period served as a reminder that geopolitical developments can influence the Cypriot economy through multiple transmission channels. Besides geopolitical uncertainty and energy-price volatility, labour shortages and climate-related pressures could weigh on costs, confidence and key sectors such as tourism, transport-logistics, trade and agriculture. At the same time, Cyprus enters this period with important strengths: solid demand, a resilient banking sector and continued opportunities from digitalisation, green investment and productivity gains. The policy focus should therefore remain balanced: preserve fiscal buffers, strengthen resilience, address labour constraints and accelerate investment that supports long-term competitiveness. In this context, risks are elevated, but Cyprus remains well positioned to sustain growth and adapt to a changing external environment.
*By Dr. Konstantinos Vrachimis, Manager, Economic Research, Eurobank Limited
This article first appeared in the 2026 edition of The Cyprus Journal of Wealth Management. Click here to view it.
