Cyprus’ GDP is expected to grow by 3.2 per cent in 2025, slightly lower than the figure of 3.4 per cent reported for 2024, according to the Central Bank of Cyprus (CBC).

This figure was included in the CBC’s latest macroeconomic forecasts for the period 2025-2027, which we were released on Monday.

The forecasts cover a number of key indicators such as Gross Domestic Product (GDP), unemployment, inflation, and core inflation (excluding energy and food).

The forecast also includes an analysis of potential deviations from the baseline scenario for both GDP and inflation.

Beyond the current year, the CBC reported that the Cypriot economy is projected to grow by 3.1 per cent annually during the period from 2026 to 2027.

This GDP trajectory is primarily attributed to the expected increase in domestic demand, with a smaller contribution from external demand, considering the heightened uncertainty in the global geopolitical and trade environment.

Private consumption is expected to support domestic demand due to the anticipated rise in real disposable income and the continued resilience of the labour market.

Although the growth rate of private consumption is projected to slow down in the coming years, it will remain a key driver of economic growth.

Additionally, significant contributions to domestic demand are expected from ongoing large non-residential private investments, infrastructure projects supporting the digital and green transition, and other reform projects under the Recovery and Resilience Plan.

Based on the latest available data, no significant negative impact has been observed on investments from the conflicts in the Middle East or from the restrictive monetary policy, which has weakened due to interest rate cuts and is expected to have a delayed effect.

The construction sector also continued to be a significant engine of economic growth throughout 2024.

For the period 2025-2027, GDP growth is also expected to be supported by net exports, particularly from the technology sector and increased exports of intellectual property services.

Furthermore, the growth rate is bolstered by the rise in turnover in the financial and professional services sector, partly due to the diversification of relevant export markets, as well as the ongoing positive contribution of the shipping sector.

Despite some negative impact from geopolitical uncertainty on external demand, this is mitigated by the resilience and adaptability of the services exports sector in response to various negative shocks.

Moreover, net exports are supported by positive developments in tourism, with fewer Israeli tourists lost than initially expected due to the ongoing Middle Eastern conflict.

The tourism sector is also benefiting from the continued diversification of Cyprus’ tourism offering towards markets with high per capita spending.

When compared with December 2024 forecasts, the GDP growth rate has been revised upwards by 0.1 percentage points for 2025 due to a base effect.

This is mainly because of slightly lower-than-expected economic growth in 2024, which was affected by a month-long strike in the concrete production sector, temporarily impacting the construction sector.

No revisions have been made for the following years, reflecting continued economic resilience and a downward trend in unemployment.

What is more, the CBC said that the labour market continues to support the Cypriot economy, with significant resilience.

Unemployment decreased to below 5 per cent of the labour force in 2024, compared to 5.8 per cent in 2023.

This aligns with positive trends recorded in the European Commission’s surveys on employment expectations over the next three months and the continued decline in registered unemployment.

With GDP growth expected, unemployment is forecasted to decrease further to 4.7 per cent in 2025-2026 and to 4.6 per cent by 2027, reaching conditions of full employment.

Compared to December 2024 forecasts, there is a minor downward revision of 0.1 percentage points in the unemployment rate for 2025, due to slightly lower-than-expected unemployment levels in 2024.

Inflation, as measured by the Harmonised Index of Consumer Prices (HICP), is projected to fall to 2.1 per cent in 2025, compared to 2.3 per cent in 2024, and to remain at 2.1 per cent for 2026-2027.

The expected reduction in inflation, both in the short and medium term, is primarily driven by the anticipated easing of remaining inflationary pressures that were caused by exogenous factors in previous years.

The continued impact of the single monetary policy, which continues to suppress demand this year with a lagged effect, will also contribute to inflationary moderation.

Additionally, the inflationary effects of wage increases are expected to be mitigated due to a slower pace of wage growth.

Furthermore, profits from businesses are expected to partially offset the inflationary impact of wage increases.

The further normalisation of inflation in industrial products excluding energy, projected for 2025-2027 compared to 2022-2023, is also expected to contribute to the stabilisation of inflation around the medium-term target of 2 per cent.

Compared with December 2024 forecasts, there has been a slight upward revision of inflation by 0.2 and 0.1 percentage points for 2025 and 2027, respectively.

This revision is primarily due to upward adjustments in energy prices and the assumption of a carbon tax being introduced for road transport and building heating fuels starting in June 2025.

For 2025, this revision also reflects a revision in service prices, which have increased slightly more than anticipated, according to recent data.

For 2027, the upward revision in inflation is due to the slightly greater-than-expected impact of the full replacement of the carbon tax with the expanded EU Emissions Trading System (ETS2), which will cover emissions from fuels used in buildings, road transport, and other sectors.

Core inflation, which excludes energy and food, is expected to further decline compared to 2024 (2.6 per cent), reaching 2.2 per cent in 2025 and 2.0 per cent during 2026-2027.

This trend in core inflation is mainly due to the normalisation of exogenous inflationary pressures that impacted domestic prices of industrial products excluding energy in previous years, as well as the continued suppressive but weakening impact of the single monetary policy of the eurozone this year.

In addition, service prices are expected to experience slower growth during 2025-2027.

Compared with December 2024 forecasts, there is a slight upward revision of 0.2 percentage points for 2025, due to the upward revision of service inflation, in line with recent data.

The small upward revision of 0.1 percentage points for 2026 is due to the indirect effects of expected increases in energy prices in 2025 and the assumption of a green tax on hotel and tourist accommodation stays starting in January 2026.

As for the probabilities of deviations from the baseline scenario for GDP, the risks are overall slightly tilted to the downside for the period 2025-2027.

Downward risks are primarily related to the expected path of external demand, which is affected by global geopolitical tensions and heightened uncertainty around global trade policy.

Additionally, a slower-than-expected easing of financing conditions may further dampen domestic demand.

These risks are partially offset by more positive-than-expected domestic developments, such as a greater-than-expected impact of tax reforms on private consumption from 2026 and higher wages due to the full-employment labour market.

However, the slightly upward risks related to wage increases are mitigated by the conservative wage growth assumptions in the baseline scenario, as well as the potential for lower-than-expected increases in household savings rates.

Regarding inflation, the risks of deviation from the baseline scenario are overall slightly tilted to the upside for the period 2025-2027.

The upward risks stem primarily from the impact of tax reforms, which may boost private consumption, while higher-than-expected wage increases (which could affect service prices) and possibly higher-than-expected profit margins for companies may also have a positive effect on domestic inflation.

On the other hand, lower energy prices due to reduced global trade, potential decisions to increase oil production, and possibly slower-than-expected easing of financing conditions partially offset these upside risks to inflation.