Cyprus' macroeconomic outlook

• The economy of Cyprus grew by 3.4% in 2024, up from 2.8% in 2023, with last year’s print being the third-best growth performance in the eurozone. Amid lower interest rates by the major central banks, but also heightened trade policy uncertainty globally, GDP growth in Q1 2025 reached 3.0%YoY, versus 2.9%YoY in Q4 2024.
• Growth in Cyprus is projected to decelerate moderately in 2025, to near 3.0%, backed by investment and household consumption. The external balance is expected to deteriorate due to higher domestic demand and trade tensions. Investments are expected to increase mainly in the property sector, financial services and ICT services.

The economy of Cyprus grew by 3.4% in 2024, up from 2.8% in 2023, with last year’s print being the third-best growth performance in the eurozone. Growth was primarily driven by a robust 5.3% increase in exports, entirely attributable to services, as goods exports posted a moderate decline. Higher exports outpaced the 2.4% rise in imports, resulting in a positive contribution from net exports equivalent to 3.0% of GDP. Household consumption increase was the second most significant growth driver, although a bit slower than in 2023 (+3.9% vs. +5.9%), underpinned by a tight labour market, with unemployment falling to a 16-year low of 4.9%. The boost to economic activity from household spending was nearly offset by a 9.5% contraction in investment, which was entirely driven by inventory drawdowns, as gross fixed capital formation was unchanged relative to 2023. On the supply side, growth was broad-based across key services sectors – including information and communication, tourism, and retail trade – as well as in construction.

Amid continuous monetary loosening by the European Central Bank from July 2024 onwards, but also trade policy uncertainty after the US elections, the economy maintained positive momentum into Q1 2025, as GDP grew by 3.0%YoY, up from 2.9%YoY in Q4 2024. As in 2024, growth was led by robust services exports (+6.8%YoY) and strong investment expansion (+19.3%YoY). Nonetheless, net exports were a drag to growth, as imports rose by 6.8%YoY. Private consumption increase weakened markedly, rising just 1.5%YoY. Amidst heightened uncertainty from geopolitical and trade tensions, trends in major international institutions’ GDP growth forecasts for Cyprus in 2025 are mixed. The IMF, in its World Economic Outlook (WEO) released in April, downgraded its projection to 2.5% from 3.1% in the previous WEO in October. In contrast, the European Commission, in its spring economic forecast released in mid-May, revised the growth forecast upwards to 3.0% from 2.8% in its November report. Eurobank Research’s forecast for 2025 is slightly higher, at 3.1%.

Domestic demand is expected to be the primary engine of GDP growth in 2025. Investment will be supported by easing financial conditions, which are already evident at stronger credit growth to businesses from December 2024 onwards, reaching a 7.6%YoY pace in April (12.5-year high). Investment is set to accelerate across several key sectors. In construction, a strong base effect is in place from a 17-year high in real estate transaction volumes in 2024, with the rise extending in January-May 2025 (+17.5%YoY). In tourism, last year’s record of over 4 million tourist arrivals and the strong increase in the number of travellers in January-April 2025 (+15.6%YoY) provide further tailwinds. Additionally, the maritime, ICT and financial services sectors are pivotal drivers of capital formation. The recent upgrade of Cyprus’ sovereign rating to ‘A’ status by all major agencies, for the first time in 13 years, is expected to enhance investor confidence and reduce funding costs for financial institutions and corporates alike. In the property sector, as a significant portion of foreign buyers comes from the Middle East, the June 2025 escalation of geopolitical tensions could disrupt the – until recently – robust demand dynamics. However, intra-EU buyers accounted for over half of the 14.8%YoY increase in foreign property transactions during January-May 2025 and could help buffer such a shock. More broadly, as seen in previous years, Cyprus could benefit from its reputation as a “safe haven” destination for investors.

Household consumption is likely to be supported from a further decline in unemployment, as well as from a recovery in household real incomes, from increases in nominal wages and continuing disinflation, albeit milder than in 2024. Risks to the inflation outlook are largely exogenous and tied to geopolitical tensions that could disrupt energy flows from the Persian Gulf and logistics through the Red Sea. However, disinflation progressed significantly in January-May 2025, not only due to energy prices but also because of rapidly declining food inflation. The recent VAT cut on electricity to 9% from 19% % could help alleviate some of the upward price pressure from the geopolitical tensions and the new green tax on fuels. Medium-term inflationary risks are more associated with services costs.

Export performance is projected to remain strong, particularly in tourism, ICT and real estate-linked services. Indicative of these prospects is the strong increase in the number of tourists in January-May this year mentioned above. In contrast, the rise in imports from higher consumption and investment is expected to weigh on the external balance. As to the potential effects from a significant increase in US tariffs, no strong direct implications are expected, as goods exports to the US accounted for just 2.1% of total exports of goods in 2015-2024. However, secondary spillover effects stemming from a potential US economic slowdown or broader disruptions to global trade may present stronger downside risks. Indicatively, the US share to Cyprus’ services exports increased markedly in 2014-2023, from 4.1% to 16.6%, driven largely by ICT-related exports.

Beyond the current volatility in the global economic environment, Cyprus’ medium- to long-term growth outlook remains robust, as it is linked to multiple sectors and activities, such as (1) energy, through major projects (natural gas extraction, Great Sea Interconnector), RES adaptation, electricity storage, (2) transport-logistics, based on an expanding shipping sector, fuelling cargo, oil and gas logistics services, (3) ICT, on the back of related reforms (headquartering framework, incentives for third-country high-level professionals) and (4) tourism, with the potential for further growth from greater market diversification and the development of the cruise branch. Construction and property markets are closely tied to these sectoral trends, reinforcing the cyclical and structural pillars of Cyprus’ growth trajectory.

• By Michail Vassileiadis, Research Economist, Eurobank Research

This opinion article first appeared in the 2025 edition of The Cyprus Journal of Wealth Management. Click here to view it. To view the full edition, click here