The Central Bank of Cyprus has revised its economic growth forecasts for this year by +0.4% in the September 2026 forecasts, compared to the June 2026 forecasts, and by +0.2% for 2027, with growth estimated at 2.9% for 2026 and 3.1% for 2027 and 2028.
At the same time, the inflation forecast was revised upwards, while the labour market forecasts are moving downwards.
According to the CBC, the September 2026 forecasts incorporate the economic impact of the ongoing war in the Middle East. As stated, due to the ongoing war in the Middle East, increased international oil prices, high refining margins (crack spreads) compared to crude oil prices and geopolitical uncertainty are expected to have an immediate negative impact on the Cypriot economy, particularly on energy prices, the tourism sectors and non-residential private investment.
The medium-term impact on the Cypriot economy will depend on the duration and intensity of the war, the CBC says, noting, however, the continued resilience of the Cypriot economy.
The CBC's base scenario adopts the working hypothesis that the conflict will last until the last quarter of 2026, followed by a gradual de-escalation.
In more detail, the GDP growth rate for 2026 is projected to slow to 2.9%, compared to 3.8% for 2025, while for the years 2027 and 2028 the GDP growth rate is expected to accelerate to 3.1% annually.
The CBC expects that domestic demand in 2026-28 will be supported by the continued positive course of private consumption due to the increase in real disposable household income despite ongoing inflationary pressures, as well as the continued resilience of the labour market, despite the aforementioned shocks.
Geopolitical uncertainty continues
Furthermore, it is noted that, although geopolitical uncertainty continues to exert pressure on investment activity, a substantial boost in domestic demand is expected from the large private residential and non-residential investments currently underway.
Although the CBC states that their implementation schedule may be affected by the ongoing crisis in the Middle East, these projects are not expected to be canceled, given their long-term completion horizon and the transitory nature of geopolitical instability.
Regarding net exports, a negative contribution to GDP is expected for 2026, reflecting the slowdown in exports, mainly due to the decrease in tourism revenues in the first half of the year due to the war in the Middle East, while at the same time, an acceleration in imports is expected, due to strong domestic demand and increased imports of services required to support related exports.
On the contrary, during the period 2027-2028, net exports are estimated to have a positive contribution to GDP, mainly due to the expected further recovery of tourism.
Compared to the June 2026 forecasts, an upward revision of the GDP growth rate by 0.4 and 0.2 percentage points is recorded for the years 2026 and 2027, respectively. According to the CBC, for 2026, the upward revision is due to the strong dynamics of the economy, despite geopolitical uncertainty, particularly in the second quarter of the year.
The CBC notes better-than-expected developments in tourism in recent months and the strong course of residential investments.
Regarding the revision for 2027, it is noted that this reflects the expected strengthening of public investments, in particular through spending on defense armor within the framework of the European SAFE program, with the participation of Cypriot companies.
The labour market is further strengthened
Regarding the labour market, the CBC says that it continues to support the Cypriot economy and record significant resilience. “Unemployment is projected to decline significantly to 3.8% in 2026 due to strong GDP growth and continued labour force growth,” it notes.
For the period 2027-28, it is expected to stabilise at 3.8%, in the context of continued strong GDP growth and the continued tightness in the labour market.
According to the CBC, the historically low unemployment rate demonstrates the expansion of the productive base of the economy.
Compared to the June 2026 forecasts, a significant downward revision in the unemployment rate is expected in 2026 by 0.8 percentage points and by 0.7 percentage points in 2027 and 2028.
The CBC states that this is due to the strong momentum that continues to govern the labour market, as recorded in the much lower than expected unemployment rates in the first half of 2026, as well as the better-than-expected macroeconomic performance in the same period, despite geopolitical uncertainty and inflationary pressures.
Inflation persists
In 2026, inflation (based on the Harmonised Index of Consumer Prices) is projected to increase significantly to 3.3% in 2026, from 0.8% in 2025, a result of the economic impact of the ongoing conflict in the Middle East.
Specifically, the CBC notes that increases in energy prices combined with high refining margins, as well as their indirect effects on the other components of inflation, are expected to exert significant upward pressures on inflation.
Upward pressures are expected in service prices, reflecting strong demand in tourism-related sectors, as well as increased energy and other operating expenses, with a smaller contribution from wages.
At the same time, food prices are expected to continue to increase, mainly due to the indirect effects of increased energy costs.
In contrast, non-energy industrial product prices are expected to remain in negative territory in 2026, partly limiting overall inflationary pressures, as a result of lower import prices from China and increasing penetration of online markets, despite the upward effects of the weakening euro.
According to the CBC, the updated forecasts incorporate existing government compensatory measures, including the VAT reduction measures on electricity and the extension of the consumption tax reduction on fuel.
Furthermore, inflation is projected to slow to 2.4% and 1.9%, respectively, in 2027 and 2028. This development mainly reflects the de-escalation of energy inflation and the gradual correction of the effects of high penetration and pass-through of production costs to other components of inflation.
At the same time, services inflation is expected to gradually slow down, while industrial product prices excluding energy are expected to continue to record deflationary pressures.
Moreover, the CBC states that inflation in 2028 includes the impact from the expected implementation of the expanded EU Emissions Trading System (ETS2), which is expected to mainly affect motor fuel prices.
Compared to the June 2026 forecasts, a small upward revision of inflation is recorded by 0.1 percentage points for 2026 and by 0.4 percentage points for 2027.
As reported, the small upward revision to 2026 mainly reflects stronger-than-expected pressures in services prices. These were partially offset by continued strong disinflationary pressures in non-energy industrial goods prices and a downward revision to energy inflation due to lower oil prices. The latter, as mentioned above, is mitigated by high refining margins.
Sharper upward revision in 2027
As for 2027, the sharper upward revision is mainly due to base effects resulting from the lower path of energy inflation in 2026, and, to a lesser extent, to increased charges from fuel refining and distribution margins.
To a lesser extent, the revision also reflects the pass-through of stronger developments in services prices into the following year.
Regarding core inflation (excluding food and energy), it is projected to increase to 2.8% in 2026, from 1.9% in 2025. According to the CBC, this increase is mainly due to the significant acceleration of services inflation, as well as the indirect effects of increased energy costs on other components of core inflation.
In 2027 it is projected to slow to 2.2%, while in 2028 it is projected to reach 1.9%, mainly reflecting the gradual slowdown in services inflation.
Compared to the June 2026 forecast, core inflation for the current year is revised upwards by 0.4 percentage points, mainly due to stronger-than-expected developments in services prices. This effect is partly offset by stronger deflationary pressures in non-energy industrial prices.
No revision is recorded for 2027 and 2028.
The CBC states that the chances of deviation from the base scenario of the forecasts for the period 2026-28 are estimated overall as downward for GDP and upward for inflation.
In particular, it notes that there is a risk of deviation in the event of a re-escalation of the war in Iran and is linked to possibly higher-than-expected energy and import prices due to problems in the supply chain.
Additional risks arise from climate change (extreme weather events, green taxes) and from possible higher-than-expected wage and profit margin increases. They are also associated with a larger-than-expected economic impact due to increases in pension benefits in the context of the upcoming pension reform.
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(Source: InBusinessNews)
