Middle East tensions weigh on Cyprus economic prospects

Cyprus’ economy is expected to slow down in 2026 as inflation accelerates, according to updated economic projections published on Wednesday by the Economics Research Centre of the University of Cyprus (CypERC), which cited the continuing conflict in the Middle East as a key source of uncertainty.

The centre forecasts real gross domestic product (GDP) growth of 2.7 per cent in 2026, down from an estimated 3.8 per cent in 2025, before strengthening to 3.1 per cent in 2027.

The latest projections also foresee inflation rising to 3 per cent in 2026, marking a sharp increase from the exceptionally low level recorded in 2025.

Compared with the centre’s previous outlook published in April, the 2026 growth forecast has been revised down by 0.2 percentage points, while the projection for 2027 remains unchanged.

According to CypERC, the downward revision reflects slower GDP growth during the first quarter of 2026 in both Cyprus and the euro area, together with developments captured by leading economic indicators between April and June.

The report said these developments are primarily linked to the continuing conflict in the Middle East, which has affected both regional and international economic conditions.

According to the centre, these developments point to rising price pressures, weaker labour demand in certain sectors, declining business and consumer confidence, increased economic uncertainty and tighter financing conditions.

Despite these headwinds, the report said Cyprus’ economy is expected to remain resilient, supported by relatively low unemployment, sound public finances and a recent increase in new housing loans.

On inflation, the centre expects the consumer price index to accelerate from 0.1 per cent in 2025 to 3 per cent in 2026, before easing to 2.1 per cent in 2027.

Compared with the April projections, the inflation forecasts for both 2026 and 2027 have been revised upwards by 0.3 percentage points.

The report attributed the higher inflation outlook mainly to sharp increases in international oil prices recorded in April and May 2026 compared with the same months of 2025, as well as a significant acceleration in domestic inflation during the second quarter of this year.

“The continuing tensions in the Middle East have intensified upward pressure on international commodity prices, particularly oil, and have increased uncertainty regarding the outlook for economic growth and inflation,” the Economics Research Centre said.

“As the effects of the conflict continue to spread through the Cypriot economy, leading to weaker external demand, stronger inflationary pressures and tighter financing conditions, the risks are tilted towards even lower economic growth than forecast, as well as even higher or more persistent inflation,” the centre added.

The revised outlook suggests that while Cyprus is still expected to outperform many European economies in terms of economic growth, external geopolitical developments continue to present significant risks to the country’s economic trajectory.

The latest projections come as policymakers and businesses continue to monitor the economic consequences of the prolonged instability in the Middle East, particularly its impact on energy markets, inflation and external demand, all of which have become increasingly important factors shaping Cyprus’ economic outlook.