Cyprus’ short-term economic outlook returned to marginal growth territory in August, according to the latest Composite Leading Economic Index (CCLEI) from the Economics Research Centre of the University of Cyprus (CypERC), although external pressures continue to weigh on the economy.

The CCLEI recorded a year-on-year increase of 0.02 per cent in August 2026, based on revised data, following declines in the previous months.

The return to positive territory was driven mainly by stronger performance across several domestic indicators, including property sales contracts, credit card transactions by Cypriots, retail sales volumes and temperature-adjusted electricity production.

These developments provided a counterbalance to weaker external conditions, with Brent crude oil prices remaining significantly higher than a year earlier and tourist arrivals lower on a year-on-year basis.

The weighted Economic Sentiment Indicator also deteriorated compared with August 2025, limiting the overall improvement in the CCLEI.

CypERC said the latest reading pointed to signs of a gradual improvement in the short-term economic outlook, although pressures from the international economic and geopolitical environment remained.

The findings come as the Central Bank of Cyprus (CBC) expects the economy to slow this year before recovering in the following two years.

The CBC projects GDP growth of 2.9 per cent in 2026, down from 3.8 per cent in 2025, followed by growth of 3.1 per cent in both 2027 and 2028.

The central bank nevertheless upgraded its forecasts compared with June, raising its 2026 projection by 0.4 percentage points and its 2027 forecast by 0.2 percentage points.

The 2026 revision reflected stronger-than-expected economic momentum, particularly during the second quarter, with the CBC pointing to better tourism developments in recent months and strong residential investment.

The central bank expects domestic demand to continue supporting the economy despite the effects of the Middle East conflict.

Private consumption is projected to remain positive as households benefit from higher real disposable incomes, although inflationary pressures are expected to persist.

The labour market and large residential and non-residential investment projects are also expected to support activity.

The CBC said the long completion periods of major projects, combined with the expectation that the geopolitical disruption would be temporary, meant such investments were not expected to be cancelled.

The main drag is expected to come from net exports, which are forecast to make a negative contribution to growth in 2026, largely because tourism revenue fell during the first half of the year amid the Middle East conflict.

Higher imports are also expected as domestic demand remains strong and more imported services are required to support related exports.

The outlook improves in 2027 and 2028, when net exports are expected to contribute positively to growth, mainly as tourism recovers further.

Taken together, the CCLEI and CBC forecasts suggest an economy being supported by domestic activity and investment while remaining exposed to external shocks, particularly energy prices, tourism and geopolitical developments.

The marginal improvement in CypERC’s leading index therefore comes against a backdrop in which the central bank expects continued growth, but at a slower pace in 2026 before an acceleration over the following two years.