2026 has been characterised by a slowdown in growth, based on new data highlighting the economic outlook for the years ahead, due to international geopolitical developments, particularly the happenings in the Middle East.
Estimates made by The Central Bank in the Economic Bulletin notes a temporary period of pressure on the economy, as the energy market, production costs, as well as general economic activity, is to be affected by the turmoil in international markets.
In addition to this, inflation is estimated to show an additional trend upward in 2026, before lowing down gradually.
The Central Bank has revised the GDP growth rate compared to March 2026, by 0.2 and 0.1 percent for 2026 and 2027 respectively, mainly due to consequences of the war in the Middle East.
This limited impact estimate for 2026, compared to the March forecasts can be attributed to the fact that a few conservative estimates of the impact had already been incorporated in the previous forecast cycle.
The Harmonised Index of Consumer Prices has helped project that inflation is set to increase significantly to 3.2% in 2026, from the previous 0.8% in 2025, again, mainly due to the economic consequences of the war in the Middle East.
As for 2027 and 2028,inflation is estimated to lower down to 1.9%, based on the expected downward base effect on energy prices, in addition to the gradual decrease in service prices and, less significantly, food prices.
Improvement appears to begin from 2027, with an upwards recovery path towards growth. Developments in the Middle East, particularly the progress of the agreement between the US and Iran have a significant role in the recovery.
The Central Bank has stated that the US and Iran’s announcement of an agreement is a positive development, though is has not yet been finalised or implemented, with many decisive parts still requiring negotiation.
“In the event that both parties do not follow through with their commitments, and the relevant agreement is not implemented, the relevant risks remain regarding disruptions in energy, commodity and raw material markets, and the path of relevant prices. Oil prices could continue to remain at these higher levels if the agreement is not finalised and fully implemented. Additional risks are associated with factors related to climate change, (e.g. extreme weather, higher than expected impact due to adoption of green taxes in the context of changes in European legislation), as well as higher than expected wages due to a tight labour market and/or higher than expected profit margins,” the Economic Bulletin states.
Damage caused to tourism
Tourism remains uncertain for 2026, with the Central Bank explaining that “geopolitical developments had a direct negative impact on the course of tourism in 2026.” More specifically, the conflict in the Middle East has led to a decrease in arrivals by 17.9% in the first four months of 2026, despite the increase recorded in the first two months of the year. At the same time, there is a 7.4% increase in revenues in January and February of 2026.
The Central Bank has also noted that the outlook for 2026 remains uncertain, with the tourism sector being challenged and other key service sectors remaining, due to geopolitical tensions in the Middle East, despite the previous announcement of an agreement between the US and Iran, in addition to the war between Russia and Ukraine.
Non-touristic services have expanded and shown resilience in recent years, which should be noted, with the impact of the fragile external environment remaining indirect.