Technology, tourism and services to underpin Cyprus GDP growth

The Central Bank of Cyprus (CBC) on Monday published its December 2025 macroeconomic forecasts, outlining expected growth, inflation and labour market trends in Cyprus through 2028 in order to assess the outlook for the domestic economy.

The central bank said gross domestic product (GDP) growth in Cyprus is forecast to reach 3.5 per cent in 2025, compared with a revised growth rate of 3.9 per cent in 2024.

The forecast further anticipates that during the period 2026 to 2028, GDP growth will average 3 per cent per year.

The projections were published as part of the central bank’s December 2025 forecasts for the main macroeconomic aggregates of Cyprus, covering GDP, unemployment, inflation and inflation excluding energy and food.

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

“The projected GDP path is mainly driven by the expected further increase in domestic demand throughout the forecast horizon,” the central bank said.

“Domestic demand is expected to be supported by higher private consumption due to rising real disposable income of households and the continued resilience of the labour market,” it added.

The central bank said private consumption is expected to remain a key driver of economic growth despite an anticipated normalisation of its growth rate in the coming years.

It also said a significant contribution to domestic demand is expected mainly from large ongoing non-residential private investments, including infrastructure projects supporting digital and green growth and other reform-related projects under the Recovery and Resilience Plan.

Residential investment is also expected to contribute to growth, although to a lesser extent.

“Despite reduced but still elevated uncertainty in US tariff policy and international trade, no significant negative impact on investment or private consumption is expected due to the very limited trade in goods between Cyprus and the United States,” the central bank said.

It added that any potential economic impact would be indirect, through possible deterioration in the external environment and Cyprus’ dependence on external demand for services.

So far, the central bank said, no negative effects have been observed.

Regarding net exports, a significant contribution is expected from the technology sector and increased exports of related services linked to the use of intellectual property.

Further support for net exports is expected from higher turnover in financial and professional services, partly due to the diversification of export markets.

Tourism is also expected to contribute positively, though to a smaller extent, with a particularly strong increase in arrivals from the United Kingdom, Israel and European Union countries.

The central bank also said that the continued diversification of the tourism product towards markets with higher per capita spending is further supporting sectoral growth.

The shipping sector is also expected to continue making a positive contribution to economic growth.

Compared with the September 2025 forecasts, GDP growth for 2025 has been revised slightly upwards by 0.2 percentage points, mainly due to better-than-expected performance in technology, trade, tourism and financial services during the third quarter of the current year.

No changes are foreseen for growth rates in the period 2026 to 2027.

The labour market continues to support the Cypriot economy and remains resilient, the central bank said.

Unemployment is forecast to decline to 4.5 per cent of the labour force in 2025, compared with 4.9 per cent in 2024, following better-than-expected outcomes in the third quarter of the current year.

“This is consistent with the positive trend recorded in the European Commission’s Business and Consumer Surveys regarding employment expectations over the next three months, as well as the continued decline in registered unemployment,” the central bank said.

“In line with strong GDP growth, unemployment is expected to stabilise around 4.5 per cent in the period 2026 to 2028, reflecting conditions of full employment,” it added.

Relative to the September 2025 forecasts, unemployment has been revised downwards by 0.2 percentage points for 2026 and 2027 due to the upward revision in GDP growth and stronger-than-expected labour market performance.

Inflation, based on the Harmonised Index of Consumer Prices, is forecast to fall sharply to 0.8 per cent in 2025, down from 2.3 per cent in 2024.

What is more, the central bank said the decline is mainly driven by deflationary pressures in non-energy industrial goods and energy prices, and to a lesser extent by slower food price growth.

“These deflationary pressures are linked to the appreciation of the euro against the US dollar, as well as the diversion of cheaper Chinese imports towards EU countries and Cyprus,” the central bank stated.

Inflation is forecast to rise again to 1.7 per cent in 2026, 2.2 per cent in 2027 and 1.9 per cent in 2028, mainly due to higher food prices and the gradual fading of deflationary pressures in energy and non-energy industrial goods.

The expected rise in energy prices is based on the assumption of the introduction of a carbon tax on fuels from 2026 until the end of 2027 under the Recovery and Resilience Plan.

This carbon tax is assumed to be fully replaced in 2028, without any impact in 2027, by the expanded EU Emissions Trading System ETS2.

The central bank also said the expected gradual slowdown in wage growth over the forecast horizon is likely to contain service price inflation compared with the period 2024 to 2025.

Inflation in 2028 is expected to decelerate mainly due to lower energy prices, based on the assumption of unchanged carbon prices compared with 2027.

Compared with the September 2025 forecasts, inflation for 2025 has been revised downwards by 0.2 percentage points, mainly due to lower-than-expected prices for processed food and non-energy industrial goods.

Inflation for 2026 has been revised downwards by 0.4 percentage points, largely due to the extension of reduced VAT on electricity from 19 per cent to 9 per cent until the end of 2026 and slower correction of deflationary pressures in non-energy industrial goods.

Core inflation, excluding energy and food, is forecast to fall further compared with 2024, when it stood at 2.6 per cent, and to average around 1.9 per cent over the period 2025 to 2028.

The central bank said core inflation will be influenced mainly by easing deflationary pressures in non-energy industrial goods and a gradual slowdown in services inflation.

Services inflation is expected to remain above its historical average due to strong external demand, particularly for tourism services, and continued domestic demand.

Relative to the September 2025 forecasts, core inflation has been revised down slightly by 0.1 percentage points for both 2025 and 2026, due to lower projected non-energy industrial goods inflation, partly offset by slightly higher services inflation.

Regarding risks to GDP growth in the period 2026 to 2028, the central bank said they are overall tilted slightly to the downside.

Downside risks relate mainly to potential indirect effects on Cypriot service exports from a weaker-than-expected external environment due to continued global trade policy uncertainty.

The central bank said these risks have been mitigated so far by the EU–US trade agreement, and no negative effects have yet been observed.

Upside risks are linked to the expected positive impact of tax reform on private consumption from 2026, higher-than-expected wage growth, broader application of cost-of-living allowance adjustments in the private sector, higher corporate profit margins and potentially lower energy prices.

For inflation, risks over the period 2026 to 2028 are assessed as slightly skewed to the upside.

Upside risks stem mainly from stronger wage increases due to labour market tightness, wider application of cost-of-living allowances, higher corporate margins and stronger private consumption following tax reform.

Downside inflation risks relate to lower energy prices due to reduced global trade, a possible end to the war in Ukraine, decisions by oil-producing economies to increase supply and potentially lower electricity prices over the medium term following the operation of the Competitive Electricity Market, the central bank concluded.