The Cypriot economy is moving through a period of increased pressures both from the outside due to the war in the Middle East and from within due to the outbreak of foot‑and‑mouth disease in livestock. However, three key pillars – strong growth in the fourth quarter of 2025, sound public finances, and low unemployment – are expected to act as a 'cushion' against the shocks.
According to the latest forecasts of the Economics Research Centre (ERC) of the University of Cyprus, these three factors limit the negative impact of the conflict in the Middle East and the health crisis in the agricultural sector, without eliminating the slowdown that is already visible on the horizon. It should be noted that the ERC’s research work also measures the impact of foot‑and‑mouth disease on the course of the economy. In general, the picture emerging from the ERC forecasts is that of an economy entering a phase of slowdown, but not crisis.
The analysis stresses that compared with the January forecasts, geopolitical tensions have escalated, while economic uncertainty in Cyprus has increased significantly due to external disturbances. As a result, the current forecasts are surrounded by a high degree of uncertainty, with the dominant risks being lower growth and higher inflation.
The baseline scenario of the April edition of the Economic Outlook forecasts that the GDP growth rate will slow from 3.8% in 2025 to 2.9% in 2026, before recovering slightly to 3.1% in 2027. The downward revision of the forecasts compared with January mainly reflects the escalation of tensions in the Middle East, which directly affects external demand for services, a key pillar of the Cypriot economy, as well as the deterioration of the economic climate.
According to the analysis, data from the first quarter of 2026 confirm the change in momentum. Indicators such as retail sales, card transactions and property sales remain on an upward path but at a clearly lower rate compared with the end of 2025. Particularly worrying is the sharp drop in tourist arrivals in March, as well as the first year‑on‑year increase in unemployment after three years.
This slowdown is attributed to a complex set of factors influenced by geopolitical developments. First, the weakening of external demand, especially from European economies that are also facing lower growth rates. Second, the increase in uncertainty among businesses and consumers, as reflected in the significant drop in the Economic Sentiment Indicator below its historical average. Third, rising inflationary pressures erode purchasing power.
In this environment, the outbreak of foot‑and‑mouth disease adds another risk factor, mainly through its impact on food prices and agricultural production. The ERC report already records sharp increases in domestic agricultural product prices during the first quarter of 2026. At the same time, foot‑and‑mouth disease is among the external shocks weighing on economic activity and employment, intensifying inflationary pressures and limiting growth momentum.
Inflation
The rise in inflation constitutes one of the key risks for the economy. The consumer price index is expected to increase from just 0.1% in 2025 to 2.7% in 2026, mainly due to the surge in international oil prices and increases in food prices. Although inflation is expected to ease to 1.8% in 2027, short‑term pressures are considered strong and persistent.
The increase in energy prices, with Brent crude recording a nearly 60% year‑on‑year rise in March, acts as a key inflation driver, passing costs through the entire economy. Combined with rising food prices, this creates an environment of a 'double inflationary shock' that affects both households and businesses.
Resilience
Despite the pressures, the Cypriot economy shows notable resilience. The strong performance of the fourth quarter of 2025, with an annual growth rate of 4.5%, provides a significant starting point for 2026. At the same time, the labour market remains in good condition, with unemployment at a 17‑year low and job creation continuing, albeit at a slowing pace.
The country’s fiscal position also plays a decisive role. Ongoing surpluses and the reduction of public debt strengthen investor confidence and provide room for targeted support measures. According to the report, the fiscal 'cushions' built up in recent years constitute a key factor in enhancing resilience against external shocks, including both the geopolitical crisis and the outbreak of foot‑and‑mouth disease.
In the financial field, conditions remain favourable, although less supportive compared with the recent past. Interest rates in the euro area have stabilised following the reductions of 2024–2025, while credit expansion in Cyprus continues, particularly in the housing sector. At the same time, the reduction of non‑performing loans and the strong deposit base enhance the stability of the banking system.
Risks
However, risks remain and could lead to a restriction of growth and a rise in inflation. Prolonged geopolitical tension could further worsen conditions by disrupting supply chains and limiting demand for tourism and other services. At the same time, the continuation of increases in energy and raw material prices may intensify secondary inflationary pressures.
On the other hand, there are also potential positive catalysts that support growth prospects. The resilience of domestic demand, investments linked to the green transition and the implementation of tax reforms could support growth. In addition, a de‑escalation of geopolitical tensions would have an immediate positive impact on both confidence and energy prices.