IMF Projects Inflation in Cyprus to Drop to 0.7% in 2025 Amid Upgraded Growth Forecasts

The International Monetary Fund (IMF) has revised upward its economic growth outlook for Cyprus, projecting stronger performance over the next two years while anticipating a sharp decline in inflation. In its October World Economic Outlook, the IMF forecast that Cyprus’s GDP will expand by 2.9 per cent in 2025 and 2.8 per cent in 2026, marking an improvement from April’s estimates of 2.5 per cent and 2.7 per cent respectively. The latest figures indicate a more optimistic assessment of the Cypriot economy, which appears to be withstanding global pressures stemming from trade tensions and slowing external demand.

A notable highlight of the IMF’s new report is its projection that inflation in Cyprus will fall dramatically. Consumer prices are expected to rise by only 0.7 per cent in 2025 — the lowest rate in the euro area — followed by a modest 1.3 per cent increase in 2026. This represents a significant shift from April’s forecast of 2.3 per cent and 2 per cent for the same years, reflecting the IMF’s belief that price pressures in Cyprus have eased substantially.

Despite these positive developments, the IMF expects the island’s current account deficit to widen, reaching 8.5 per cent of GDP in 2025 and 9.1 per cent in 2026. These figures are higher than the earlier projections of 7.3 per cent and 7.8 per cent, which the Fund attributed to stronger import growth driven by robust domestic demand and heightened activity in the services sector.

The employment outlook remains favourable, with unemployment forecast to stay low. The IMF now expects the jobless rate to average 4.5 per cent in 2025 and rise slightly to 4.7 per cent in 2026. Both figures are an improvement on April’s estimates of 4.8 per cent and 5 per cent, suggesting that the Cypriot labour market continues to perform better than expected.

On a broader scale, the IMF’s October report also reflects a modestly more positive view of the global economy. The Fund now anticipates world growth of 3.2 per cent in 2025 and 3.1 per cent in 2026, up from April’s projections of 2.8 per cent and 3 per cent. Even so, it warned that “global expansion remains below the pre-pandemic average of 3.7 per cent.”

Growth in advanced economies is projected to decelerate to 1.6 per cent in both 2025 and 2026 — around 0.2 percentage points lower than in 2024. In the United States, growth is expected to moderate to 2 per cent in 2025 and 2.1 per cent in 2026, while the euro area is forecast to see a mild recovery with 1.2 per cent growth in 2025 and 1.1 per cent in 2026. Though these represent slight improvements compared with April’s report, they remain roughly 0.4 percentage points below the IMF’s October 2024 projections.

According to the Fund, the persistent drag on advanced economies stems from “high uncertainty, rising tariffs and weak external demand,” although it noted that “rebounding consumption and fiscal easing in Germany in 2026 should lend support.”

In Asia, China’s growth is expected to reach 4.8 per cent in 2025 before slowing to 4.2 per cent in 2026, while India continues to post strong expansion at 6.6 per cent and 6.2 per cent in the same years. The IMF emphasized that global output has been “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 Fund said, noting that the focus among policymakers is shifting “from the level of tariffs to their impact on prices, investment and consumption.”

According to the report, protectionist measures have so far had only a modest 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 IMF observed that “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.” It added that households and firms had “brought forward spending and investment in anticipation of higher tariffs,” temporarily boosting global growth earlier in the year.

Trade patterns have also started to realign, with flows shifting toward third countries, while delays in the implementation of new tariffs allowed companies to postpone price hikes until there was greater clarity. The IMF noted that a weaker U.S. dollar has “helped offset some of the tariff impact,” supporting international trade, easing inflationary pressures through exchange rates, and giving emerging markets more room to stimulate their economies.

Even so, the Fund warned that early signs of strain are visible. “Core inflation in the United States has increased, while unemployment has also edged slightly higher,” it said. “In several other economies, inflation remains above central bank targets and expectations are fragile,” a trend that it said is complicating monetary policy amid heightened uncertainty.

The IMF identified several downside risks to the global outlook, including “prolonged trade policy uncertainty, intensifying protectionism, demographic pressures from an ageing population, fiscal vulnerabilities and potential financial instability.” At the same time, it stressed that global growth could be boosted by “progress in trade negotiations, faster structural reforms and advances in artificial intelligence,” which, it suggested, could “spark a new wave of productivity gains worldwide.”

By fLEXI tEAM