Cyprus Central Bank Projects Growth, Lower Unemployment, and Declining Inflation for 2025

The Central Bank of Cyprus (CBC) on Tuesday released its September 2025 macroeconomic projections, forecasting steady growth for the Cypriot economy in the coming year. According to the projections, gross domestic product (GDP) is expected to expand by 3.3 per cent in 2025, unemployment to decline to 4.6 per cent, and inflation to ease sharply to 1 per cent.

Compared with the CBC’s June 2025 forecasts, the latest figures represent a slight upward revision in GDP growth by 0.2 percentage points, a change the bank attributed to stronger-than-anticipated tourism activity. The CBC noted that projections for 2026 and 2027 remain unchanged from earlier estimates. At the same time, unemployment was revised downwards by 0.2 percentage points for 2025 and 0.1 percentage points for 2026, while inflation was adjusted down by 0.4 percentage points for 2025 and 0.2 percentage points for 2027. Core inflation, excluding food and energy, was revised marginally lower by 0.1 percentage points across the 2025–2027 horizon.

GDP growth is forecast at 3.3 per cent in 2025, slightly below the 3.4 per cent recorded in 2024, before moderating to 3 per cent annually in both 2026 and 2027. The CBC explained that the growth outlook is primarily driven by further increases in domestic demand, which is expected to remain the backbone of economic activity throughout the period. Domestic demand will be supported by higher private consumption, bolstered by an increase in real disposable household income as inflationary pressures ease, coupled with the resilience of the labour market.

Although private consumption growth is expected to normalise in subsequent years, it will continue to be a major contributor to activity. Large-scale private non-residential investments, particularly infrastructure projects tied to digital and green development, are also anticipated to fuel demand. Reform-related initiatives under the Recovery and Resilience Plan will further add to this momentum, though residential investment is expected to play a smaller role.

The CBC acknowledged uncertainty stemming from potential changes in United States trade policy, which could weigh on global trade. However, it stressed that Cyprus’ limited trade in goods with the US means there is no major direct risk to investment or private consumption. Any effects, the CBC noted, would be indirect, through “a deterioration of global sentiment and the Cypriot economy’s dependence on external demand for services.”

Net exports are projected to contribute significantly to growth, largely thanks to the performance of tourism, with notable increases in arrivals from the United Kingdom, Israel, and other EU markets. The CBC added that the ongoing diversification of Cyprus’ tourism product towards higher-spending visitors is expected to further strengthen the sector. Beyond tourism, technology-related services and intellectual property exports are forecast to sustain net exports, while financial and professional services will add a smaller but positive contribution, supported by market diversification. The shipping industry is also expected to remain a positive contributor, though overall export growth faces headwinds from fragile global demand and geopolitical uncertainty.

The labour market is forecast to remain robust, continuing to underpin the economy. Unemployment is expected to drop to 4.6 per cent in 2025 from 4.9 per cent in 2024, consistent with the European Commission’s economic sentiment surveys and the continued decline in registered unemployed persons. For 2026 and 2027, unemployment is projected to stabilise around 4.7 per cent, edging close to conditions of full employment.

Inflation, measured by the Harmonised Index of Consumer Prices, is set to fall to 1 per cent in 2025 from 2.3 per cent in 2024, before rising again to 2 per cent in 2026 and 2.2 per cent in 2027. The sharp decline in 2025 is attributed mainly to downward pressures on energy prices, lower non-energy industrial goods costs, and slower food price increases. The CBC said non-energy industrial goods prices will continue to decline, partly due to the appreciation of the euro against the US dollar. By contrast, the expected rise in inflation in 2026 and 2027 will be driven by higher energy costs and the gradual fading of downward price pressures.

Energy prices are projected to climb in response to the introduction of a carbon tax on fuels in 2026, followed by its full replacement by the expanded EU Emissions Trading System (ETS2) in 2027. Meanwhile, a gradual slowdown in wage growth is expected to help contain services prices across the forecast horizon.

The central bank emphasised that the 0.4 percentage point downward revision for inflation in 2025 primarily reflects “the lower-than-expected prices of non-energy industrial goods in recent months and the significant downward revision in food prices.” For 2027, the adjustment is attributed to lower anticipated energy prices. Core inflation is projected to fall from 2.6 per cent in 2024 to 2 per cent in 2025, then decline further to 1.8 per cent in both 2026 and 2027. This trend, according to the CBC, reflects the normalisation of non-energy industrial goods prices, partly due to the stronger euro. Service prices are expected to remain elevated in 2025 amid strong demand for tourism-related services before easing in 2026 and 2027, though still above historical averages due to robust domestic and external demand.

The CBC cautioned that downside risks to GDP projections for 2025 to 2027 slightly outweigh upside risks. The key downside risks include potential indirect effects on Cyprus’ services exports if the global environment deteriorates further, particularly because of uncertainty around global trade policy. Upside risks, meanwhile, are tied to the positive impact of tax reform on private consumption from 2026, stronger-than-expected wage growth, higher firm profit margins, and lower-than-anticipated energy prices, potentially resulting from favourable geopolitical shifts.

On inflation, the balance of risks is assessed as “slightly tilted to the upside” for the 2025–2027 period. Upside risks are linked to stronger wage growth, higher profit margins, and a boost to private consumption from tax reform starting in 2026. Downside risks, the CBC added, include weaker energy prices due to subdued global trade, a potential end to the war in Ukraine, increased oil supply from producers, and lower electricity prices following the launch of the Competitive Electricity Market.

By fLEXI tEAM