IMF sees inflation easing to 0.7 per cent in Cyprus next year

The International Monetary Fund (IMF) has upgraded its economic growth forecasts for Cyprus for both 2025 and 2026 in its October World Economic Outlook, compared with its April projections.

The IMF now expects Cyprus’s GDP to grow by 2.9 per cent in 2025 and 2.8 per cent in 2026, up from 2.5 per cent and 2.7 per cent respectively in April’s report.

The fund’s latest forecast points to a stronger-than-expected performance for the Cypriot economy, despite global headwinds linked to trade tensions and slower external demand. Inflation is also set to ease sharply.

The IMF projects that consumer prices in Cyprus will rise by only 0.7 per cent in 2025, the lowest increase in the euro area, followed by 1.3 per cent in 2026.

This compares with its April estimates of 2.3 per cent and 2 per cent for the same years, suggesting that price pressures in Cyprus are now viewed as significantly more subdued.

The current account deficit is expected to widen, however, reaching 8.5 per cent of GDP in 2025 and 9.1 per cent in 2026, compared with earlier forecasts of 7.3 per cent and 7.8 per cent.

The IMF said this reflects stronger import growth linked to domestic demand and higher service sector activity.

What is more, unemployment is projected to remain low. The jobless rate is forecast to average 4.5 per cent in 2025, rising slightly to 4.7 per cent in 2026.

Both figures are lower than April’s projections of 4.8 per cent and 5 per cent, confirming the IMF’s more optimistic view of the Cypriot labour market.

The October outlook also revises global forecasts upwards, as the IMF now expects the world economy to expand by 3.2 per cent in 2025 and 3.1 per cent in 2026.

In comparison, its April report had estimated growth at 2.8 per cent and 3 per cent respectively.

Despite this improvement, the IMF warned that global expansion remains below the pre-pandemic average of 3.7 per cent.

Growth in advanced economies is expected to slow to 1.6 per cent in both 2025 and 2026, roughly 0.2 percentage points lower than in 2024.

In the United States, growth is forecast to ease to 2 per cent in 2025 and 2.1 per cent in 2026, while the euro area is expected to recover slightly, growing 1.2 per cent in 2025 and 1.1 per cent in 2026.

Although these figures represent an improvement compared with April’s outlook, they remain 0.4 percentage points below the IMF’s projections from October 2024.

The fund attributed this to high uncertainty, rising tariffs and weak external demand, but said that rebounding consumption and fiscal easing in Germany in 2026 should lend support.

In China, growth is projected at 4.8 per cent in 2025, slowing to 4.2 per cent in 2026, while India is expected to maintain robust momentum with 6.6 per cent and 6.2 per cent growth in those years.

According to the IMF, global growth has proven more resilient than anticipated thanks to the limited short-term impact of new trade tariffs.

However, it cautioned that trade policy uncertainty remains high and that the effects of tariffs could still emerge over time.

“The uncertainty surrounding trade policy remains elevated in the absence of clear, transparent and stable agreements among trade partners,” the IMF said.

It added that the focus is shifting from the level of tariffs to their impact on prices, investment and consumption.

The fund explained that most protectionist measures have so far had a limited effect on global output and inflation, with economic activity maintaining an annualised quarterly pace of around 3.5 per cent in the first half of 2025.

“The unexpected resilience of economic activity and the modest inflation response reflect a range of temporary relief factors rather than a genuine improvement in fundamentals,” the IMF said.

It pointed out that households and firms brought forward spending and investment in anticipation of higher tariffs, giving a temporary boost to global activity early in the year.

Trade flows have also begun to adjust towards third countries, while delays in the implementation of new tariffs allowed companies to postpone price increases until further clarity was provided.

The IMF said that a weaker dollar has helped offset some of the tariff impact, supporting global trade, easing inflationary pressures through exchange rates, and providing policymakers in emerging economies with greater flexibility to support growth.

Even so, it warned that signs of strain are starting to appear. “Core inflation in the United States has increased, while unemployment has also edged slightly higher,” the IMF said.

It added that in several other economies, inflation remains above central bank targets and expectations are fragile, complicating monetary policy amid rising uncertainty.

The IMF also highlighted several downside risks, including prolonged trade policy uncertainty, intensifying protectionism, demographic pressures from an ageing population, fiscal vulnerabilities and potential financial instability.

At the same time, the fund said that global growth could be lifted by progress in trade negotiations, faster structural reforms and advances in artificial intelligence, which could spark a new wave of productivity gains worldwide.