Cyprus eyes 3% growth in 2025, but global trade risks loom

Cyprus’ economy is expected to maintain robust momentum, with GDP growth projected at 3% in 2025 and 2.5% in 2026, following a 3.4% expansion in 2024, according to the European Commission’s Spring Forecast.

Private consumption remains the main engine of growth, buoyed by rising wages and easing inflation. Investment is also set to accelerate, driven by Recovery and Resilience Facility (RRF) funds and large-scale construction projects. Net exports continue to perform strongly, powered by tourism, ICT, and shipping.

The economy is undergoing a structural transformation, with foreign investment flowing into high-productivity sectors such as ICT. However, the repatriation of profits by foreign-owned firms will partly offset gains in the trade balance. Still, the current account deficit is expected to narrow to 5.9% of GDP by 2026.

Unemployment and inflation pressure weaken

Unemployment hit a 15-year low of 4.7% at the end of 2024, with limited signs of labour market overheating. While headquartering policies helped boost foreign worker inflows, this trend is expected to ease as initial corporate relocations plateau.

Inflation is projected to stabilise at 2% by 2026. Recent spikes in food and tourism prices – driven by delayed wage pass-through and strong demand – are expected to subside as energy and goods prices moderate.

A bright fiscal outlook

Public finances remain a bright spot. Cyprus posted a headline surplus of 4.3% of GDP in 2024, with surpluses of 3.5% and 3.4% expected in 2025 and 2026, respectively. Government debt is on track to fall below 60% of GDP in 2025 and reach 51.9% by 2026, underpinned by revenue growth and fiscal discipline.

However, external risks persist. While direct trade exposure to US tariffs is limited, Cyprus’ heavy reliance on global shipping makes it vulnerable to wider trade disruptions.

The EU Picture

The EU economy began 2025 on a stronger footing, with first-quarter GDP growth of 0.3%, but global trade tensions and geopolitical uncertainty have dampened the outlook. The European Commission now forecasts GDP growth of 1.1% in 2025 and 1.5% in 2026, with the euro area slightly lower at 0.9% and 1.4%, respectively. Inflation is expected to ease to 2.1% in 2025 and 1.7% in 2026. Investment, which declined in 2024, is set to rebound – rising 1.5% in 2025 and 2.4% in 2026 – supported by infrastructure and R&D spending. Private consumption remains stable, while unemployment is projected to fall to an all-time low of 5.7% by 2026, helped by ongoing real wage growth. The budget deficit is expected to hold at 3.3%, while debt levels edge up to 84.5% of GDP by 2026. While risks persist, including trade disruption and climate events, stronger EU-US trade ties could offer upside potential.