The Central Bank of Cyprus has cut its economic growth forecast and sharply raised its inflation outlook for 2026, citing the war in the Middle East as the primary drag on the island’s economy.
In its March macroeconomic forecasts published on Tuesday, the bank projected GDP growth of 2.7% for 2026, down from 3.8% in 2025 and 0.3 percentage points below its December forecast. Inflation is now expected to reach 2.7% — more than three times the 0.8% recorded in 2025 and a full percentage point above the bank’s previous projection.
The bank’s baseline scenario assumes the war will last approximately two months at high intensity before gradually de-escalating, but stresses that the medium-term impact will depend on the conflict’s duration and severity. The primary channels of impact are higher oil prices and heightened geopolitical uncertainty, with tourism, shipping, construction and real estate — all heavily dependent on foreign investment — identified as the most exposed sectors. Service exports are also expected to decline due to weaker external demand, with all main components of GDP — private consumption, investment and net exports — affected.
Despite the downward revision, the bank said domestic demand would continue to be supported by rising real disposable income, a resilient labour market and ongoing large non-residential private investments, including infrastructure projects under the Recovery and Resilience Plan. Consumer confidence has been hit by the war but private consumption is expected to remain a key pillar of growth. The technology sector is also expected to continue boosting service exports linked to intellectual property, while financial and professional services are seen contributing positively due to their diversified markets.
Tourism is expected to contract in 2026, with recovery forecast from 2027 and a gradual increase in arrivals from the United Kingdom, Israel and EU countries. Shipping disruptions are also expected to ease from 2027. Growth is projected to pick up to 2.9% in 2027 and 3.1% in 2028, with the slight upward revision for 2028 linked to an expected gradual recovery in economic confidence.
Unemployment is forecast to remain around 4.5% throughout 2026–2028, with only a minor negative impact on employment growth this year. The bank made no revision to its unemployment forecast compared with December.
The surge in inflation is driven primarily by energy prices following the rise in international oil costs, with indirect effects feeding through to other components. Further upward pressure is expected on industrial goods prices due to supply chain disruptions and higher production costs, and on food prices due to costlier fertilisers and the impact of the foot-and-mouth disease outbreak on meat and dairy prices. The foot-and-mouth outbreak is expected to have a very limited overall impact on GDP and the labour market given the small size of the livestock sector, with its effects forecast to dissipate by the end of 2026. Inflation is projected to ease to 2.0% in 2027 as energy and services prices moderate, before edging back up to 2.2% in 2028, partly due to the expected introduction of the EU’s expanded ETS2 emissions trading scheme affecting transport and heating fuel prices.
US tariff policy uncertainty is not expected to have a material negative impact on Cyprus, the bank said, given the limited volume of goods trade between the two countries.
The bank described the risks to its GDP outlook as predominantly downside, citing the possibility of higher-than-expected energy prices, import disruptions, a more severe hit to service exports if the war is prolonged, global trade policy uncertainty and climate-related factors. Inflation risks are assessed as predominantly upside, linked to the potential for even higher energy and import prices, stronger wage pressures or wider profit margins. Downside inflation risks exist only if the war’s impact proves more limited and short-lived than currently assumed.
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