CBC warns of downside risks despite steady economic growth

The Central Bank of Cyprus (CBC) on Tuesday forecast steady growth for the Cypriot economy in 2025.

According to its September 2025 macroeconomic projections, gross domestic product (GDP) is expected to rise by 3.3 per cent, unemployment to fall to 4.6 per cent, and inflation to drop to 1 per cent.

Compared with its June 2025 forecasts, the CBC slightly revised its GDP growth estimate upwards by 0.2 percentage points for 2025, citing a stronger-than-expected performance in tourism.

For the period 2026 to 2027, the central bank said it does not expect changes to its earlier projections.

The CBC also revised its unemployment projections slightly downwards by 0.2 percentage points for 2025 and by 0.1 percentage points for 2026 compared with its June forecasts.

In addition, inflation was revised down by 0.4 percentage points for 2025 and by 0.2 percentage points for 2027.

Core inflation, which excludes energy and food, was adjusted marginally lower by 0.1 percentage points for each year in the 2025 to 2027 horizon.

GDP growth is forecast to reach 3.3 per cent in 2025, slightly lower than the 3.4 per cent recorded in 2024, before moderating to 3 per cent annually in 2026 and 2027.

The central bank said this growth outlook is primarily driven by further increases in domestic demand throughout the projection period.

Domestic demand is expected to be supported by higher private consumption, boosted by an increase in real disposable household income as inflationary pressures continue to ease, along with the resilience of the labour market.

Although private consumption growth is expected to normalise in the coming years, it is projected to remain a key driver of economic activity.

Large-scale private non-residential investments, including infrastructure projects supporting digital and green development, are also expected to contribute significantly to domestic demand.

Other reform-related projects under the Recovery and Resilience Plan will add to this growth, with residential investment making a smaller contribution.

Despite uncertainty around United States trade policy and the impact this could have on global trade, the CBC said there is no major negative effect expected on investment or private consumption because Cyprus’ trade in goods with the US is very limited.

Any potential economic impact, the CBC added, 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, supported by tourism, with a notable rise in arrivals from the United Kingdom, Israel and other EU countries.

The continued diversification of the tourism product towards higher-spending markets is expected to further support the sector’s development.

Moreover, technology-related services and intellectual property exports are also expected to sustain net exports, while financial and professional services exports will make a smaller but positive contribution, partly due to market diversification.

The shipping sector is also expected to continue contributing positively to growth, although export growth is negatively affected by fragile external demand amid global trade and geopolitical uncertainty.

The labour market is expected to remain resilient, the CBC continued, continuing to support the economy.

The CBC also said that unemployment is forecast to fall to 4.6 per cent in 2025, from 4.9 per cent in 2024.

This aligns with positive employment expectations recorded in the European Commission’s economic sentiment surveys and the continued decline in registered unemployed persons.

Unemployment is expected to stabilise at around 4.7 per cent in 2026 and 2027, approaching full-employment conditions.

Inflation, measured by the Harmonised Index of Consumer Prices, is forecast to decline to 1 per cent in 2025, from 2.3 per cent in 2024, before rising to 2 per cent in 2026 and 2.2 per cent in 2027.

The significant drop in inflation in 2025 is mainly attributed to downward pressures on energy prices, as reflected in current data, lower prices for non-energy industrial goods and, to a lesser extent, slower food price growth.

Prices of non-energy industrial goods are expected to continue to decline, partly due to the appreciation of the euro against the US dollar.

The forecasted increase in inflation in 2026 and 2027 is mainly due to rising energy prices and the gradual fading of downward pressures on non-energy industrial goods.

The increase in energy prices is expected to result from 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.

The gradual slowdown of wage growth over the projection horizon is expected to help contain services prices.

The CBC further stated that the downward revision of inflation by 0.4 percentage points for 2025 mainly reflects the lower-than-expected prices of non-energy industrial goods in recent months and the significant downward revision in food prices.

The downward revision for 2027 is attributed to lower expected energy prices.

Core inflation is projected to fall to 2 per cent in 2025 and to 1.8 per cent in 2026 and 2027, down from 2.6 per cent in 2024.

The CBC said this trend reflects further normalisation of non-energy industrial goods prices, partly due to the appreciation of the euro against the US dollar.

Service prices are expected to remain at high levels in 2025 due to continued strong demand for tourism-related services, before easing in 2026 and 2027 but remaining above the historical average because of strong external and domestic demand.

The CBC further stated that downside risks to GDP projections for 2025 to 2027 slightly outweigh upside risks.

Downside risks are linked to potential indirect effects on Cypriot services exports from a worse-than-expected external environment, primarily due to global trade policy uncertainty.

Upside risks are linked to the expected positive impact of tax reform on private consumption from 2026, stronger-than-expected wage growth, higher profit margins for firms and lower-than-expected energy prices, partly due to possible positive geopolitical developments.

For inflation, the balance of risks is assessed as slightly tilted to the upside for 2025 to 2027.

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 include lower energy prices due to weaker global trade, a possible end to the war in Ukraine, increased oil supply from producer countries and potentially lower electricity prices following the launch of the Competitive Electricity Market.