Despite the deterioration in the international economic environment following the outbreak of the US–Iran war, the Cypriot economy remained resilient in the second quarter of 2026, with GDP growth accelerating to 3.3% year-on-year, from 3.0% in the previous quarter.
This was the fourth-highest growth rate in the euro area in the second quarter. Based on the expenditure approach, growth was driven mainly by private consumption (+5.4% year-on-year) and gross fixed capital formation (+9.4%).
The investment performance was driven primarily by a sharp rise in investment in transport equipment (+151.9%), while investment in housing increased more moderately (+4.3%).
Private consumption continued to be supported by favourable labour market conditions, with unemployment near historic lows for this time of year (3.6% in Q2 2026, compared with 3.2% in Q2 2008), as well as by strong growth in consumer credit (+12.0% year-on-year) and a significant increase in wages (+3.9% in the hourly wage, the largest increase of the past five quarters).
Admittedly, private consumption has historically been one of the most stable pillars of Cyprus’s economic growth, and its current contribution is consistent with previous periods of strong economic expansion.
Public consumption also contributed positively to growth, rising by 4.5% year-on-year. Exports increased by 9.6%, mainly thanks to services exports. However, the external surplus narrowed by 45.1%, as imports rose by 12.9%, mainly due to the aforementioned increase in investment in transport equipment.
Therefore, despite the strong performance of services exports, the external sector made a negative contribution to GDP growth, as the increase in imports more than offset the positive effect of exports.
On the production side, the acceleration in growth came mainly from increased activity in wholesale and retail trade, information and communication technology (ICT) services, financial and insurance activities, and construction.
Contribution of GDP components to growth
Early indications for the third quarter suggest that the strong growth momentum is continuing, despite the prolonged geopolitical tension in the Persian Gulf. In the investment sector, property sales increased by 10.7% year-on-year in July–August, bringing the growth rate since the beginning of the year to 13.7% and putting the market in 2026 on course for a new record high.
Strong demand is also reflected in house prices, which rose by 8.5% year-on-year in the second quarter, pushing the relevant index to a new record high. The increased demand comes mainly from non-resident buyers, who accounted for 59% of the increase in property sales during January–August.
Subsequently, construction activity is expected to remain strong to meet demand, having already recorded a 43.1% year-on-year increase in building surface area during January–May. In addition, investment in transport equipment and intellectual property rights is expected to continue supporting gross fixed capital formation for the remainder of 2026, mainly through favourable base effects.
Export performance also proved more resilient than initially expected. The sharp drop in tourist arrivals recorded in March and April (-28.6% year-on-year) narrowed significantly in June (-1.7%) and July (-1.1%), before widening slightly in August (-3.3%).
As a result, tourist arrivals fell by 7.0% during January–August compared with last year, a performance broadly within the 4.7%–5.8% decline range forecast in September in Cyprus Insights. Under these forecasts, tourism activity will remain higher than 2024 levels, despite the adverse geopolitical environment.
At the same time, real estate and intellectual property rights services are expected to continue supporting export growth.
The outlook for private consumption is affected by opposing forces. On the one hand, inflationary pressures re-emerged in August, with headline inflation accelerating to 5.2% year-on-year, from 4.4% in July, mainly due to rising energy prices, despite the continuation of existing support measures.
These developments increase uncertainty about inflation dynamics after the gradual withdrawal of the measures. On the other hand, labour market conditions remain generally supportive of consumption. As mentioned above, the unemployment rate remained close to historic lows in the second quarter, despite a 9.4% year-on-year increase in the number of registered unemployed.
An encouraging development is that unemployment fell compared with the previous quarter, despite a significant 1.6% quarterly increase in the labour force, with 65.1% of this increase coming from non-permanent residents. This suggests that Cyprus continues to attract workers from abroad, a development particularly important given the labour shortages facing the country, which are reflected in the relatively high job vacancy rate (2.6% in Q2 2026).
In addition, there are signs of further improvement in labour market conditions in the third quarter, as the year-on-year increase in registered unemployed slowed to 6.5% during July–August.
A further indication of the resilience of the Cypriot economy’s fundamentals and its favourable medium-term prospects is the country’s recent credit rating upgrade by S&P, from A- to A, with a positive outlook.
According to the rating agency, the upgrade reflects the continued reduction of external and public debt, supported by strong real economic growth rates.
Sources: CYSTAT, Eurobank Research
