Trade tensions and instability pose economic risks

The Cyprus Economy and Competitiveness Council on Wednesday underscored the urgent need for strict fiscal discipline and targeted strategic investments.

It also warned that escalating trade tariffs and geopolitical instability are shaping an environment of heightened economic risk that could derail the country’s growth trajectory.

According to a statement issued by the council, while these developments are not expected to have significant immediate economic effects, they nonetheless pose serious threats to the long-term stability of the Cypriot economy.

The council noted that the International Monetary Fund (IMF) has already cautioned that rising trade tensions and policy uncertainty could limit economic growth both in the short and long term.

It added that the University of Cyprus’ Economic Research Centre (CypERC) has also identified risks related to both economic growth and fiscal sustainability.

“Given these challenges, Cyprus must be especially cautious in expanding inflexible public expenditures, as this would constrain the fiscal flexibility needed to address immediate challenges such as the water supply and demographic issues, as well as critical transitions in energy and technology,” the statement read.

It further noted that recent IMF reports highlight the negative impact of increasing trade barriers, which are causing global growth forecasts to be downgraded, while also citing the risks associated with market instability and sovereign debt sustainability.

Regarding Cyprus, the IMF has downgraded its projections, estimating that GDP growth in 2025 will slow to 2.5 per cent, compared to its previous forecast of 3.1 per cent, while it predicts 2.7 per cent growth in 2026.

The council also highlighted the CypERC’s latest report, which anticipates that Cyprus’ economic growth will moderate from 3.4 per cent in 2024 to 2.8 per cent in 2025, before improving to 3.2 per cent in 2026.

At the same time, the CypERC stressed the importance of monitoring reputable economic indicators, such as the Cyprus Composite Leading Economic Index, which suggests that economic uncertainty can reduce investment and consumer confidence, thereby placing further strain on fiscal pressures.

The council observed that although Cyprus has significantly reduced its public debt as a percentage of GDP and continues to post fiscal surpluses, the need for fiscal prudence stems from the current economic environment, which demands especially careful management of public spending.

“The increase in inflexible expenses, such as permanent wage commitments or large-scale projects, and additional general, non-targeted tax cuts could restrict the state’s ability to respond to economic uncertainties,” the Council said.

“On the contrary, fiscal policy must remain flexible, ensuring resources are available to address unforeseen challenges amid the broader climate of instability, and to support strategic investments in energy and technology,” it added.

The council stressed the importance of maintaining fiscal discipline, warning of the dangers associated with potential increases in inflexible spending or revenue reductions.

It argued that reducing public debt and creating fiscal space are essential for enabling effective state intervention in the event of a future economic crisis.

Special emphasis was placed on the need to strengthen economic resilience through policies that promote diversification of the productive base and reduce dependence on a limited number of external partners and products.

The council also recommended prioritising strategic investments, particularly in the energy and technology sectors, with the aim of boosting competitiveness and achieving long-term sustainability.

What is more, the council underlined the importance of active international cooperation and Cyprus’ participation in global initiatives that promote the stability and predictability of the international trade environment.

The council further stated that Cyprus is at a pivotal point where prudent fiscal management is crucial for addressing global economic uncertainties.

“With the adoption of prudent fiscal practices and a focus on strategic investments, our country can ensure its long-term stability and growth,” it noted.

The council also reminded the public that having sufficient fiscal space before the Covid-19 pandemic in 2020, compared to the period before the financial crisis of 2011, was one of the key factors that allowed Cyprus to respond more effectively and recover more robustly.