Strong domestic demand remains the primary driver of economic growth in Cyprus for 2025 and the three-year period spanning 2026-2028, while external demand continues to make a positive but more limited contribution, the Central Bank said.
According to the Central Bank’s analysis, the expansion of the economy has been supported by an increase in private consumption, robust investment activity, rising public consumption, and a positive performance in net exports. Private consumption grew by 3.3% in 2025, compared to 4% in 2024, bolstered by improvements in households’ real disposable income and near full employment conditions in the labour market.
The regulator expects this trend to persist through 2028. The Central Bank forecasts that resilient private consumption will continue to underpin domestic demand, driven by further gains in real disposable income and a sustained strong labour market.
These factors are projected to largely offset the impact of heightened inflationary pressures, keeping consumption on an upward path. Furthermore, despite the pressure that geopolitical uncertainty exerts on investment activity, substantial reinforcement of domestic demand is expected from ongoing large-scale private non-residential investments. Although the implementation schedules of these projects may be affected by the crisis in the Middle East, they are not expected to be cancelled, given the temporary nature of the geopolitical instability and their long-term completion horizons.
Investments also provided a significant boost to growth in 2025, rising by 6.2% when excluding the impact of Special Purpose Entities (SPEs), the Central Bank maintained. This increase is mainly attributed to the strengthening of public and non-residential private investments, alongside a positive contribution from residential housing investments. Public consumption had a positive but comparatively smaller share, growing by 2% in 2025 against 1.6% the previous year, driven primarily by an increase in staff compensation.
Net exports, adjusted for the impact of SPEs, also contributed positively to economic growth, aligning with an improvement in the trade balance. This development stems from a higher growth rate in exports, which rose by 5%, compared to a 2.5% increase in imports.
From a sectoral perspective, economic activity strengthened across all major sectors of the economy during 2025. The sectors of trade, transport, hotels, and restaurants made the largest contribution to GDP growth, adding 1.5 percentage points and reflecting the momentum of private consumption and tourism. Information and communication followed with a 0.9 percentage point contribution, supported by the further growth of foreign interest companies establishing headquarters (headquartering), particularly in the technology sector. The construction sector contributed 0.3 percentage points, while professional services and financial activities contributed 0.2 percentage points each.
However, the Central Bank noted that the latest qualitative indicators (soft data) for the second quarter of 2026 suggest a slowdown in economic activity. The Economic Sentiment Indicator (ESI) and individual confidence sub-indices indicate that the Cypriot economy has been negatively affected by recent developments in the Middle East. Specifically, during the two-month period of April–May 2026, the ESI stood at 99.5, falling below the average recorded in the first quarter of 2026, with deterioration recorded across all individual sub-indices.