Cyprus economy to grow 3 per cent in 2026

The International Monetary Fund (IMF) has reported that Cyprus will record real GDP growth of 3.8 per cent in 2025 and 3 per cent in 2026, even as global economic risks intensify due to the war in the Middle East.

The projections place Cyprus among the stronger performing economies, despite a broader slowdown expected across Europe and globally.

The IMF warned that the global economy is entering a period of heightened uncertainty, with conflict driven disruptions testing recent resilience.

Global growth is now forecast at 3.1 per cent in 2026 and 3.2 per cent in 2027, under the assumption that the conflict remains limited in scope and duration.

The updated forecast marks a downgrade from earlier expectations, reflecting the impact of rising energy prices and tighter financial conditions following the outbreak of war involving Iran.

The fund also expects global inflation to rise to 4.4 per cent in 2026, before easing to 3.7 per cent in 2027.

“Global growth could be derailed by the war in the Middle East as the conflict drives higher energy prices,” the IMF said.

It stressed that the outlook is subject to significant downside risks, particularly if the conflict intensifies or persists.

In more adverse scenarios, the IMF said global growth could slow to 2.5 per cent or even close to 2 per cent, depending on the scale of energy market disruption.

Under its baseline scenario, average oil prices are projected at 82 dollars in 2026 and 75 dollars in 2027, with relatively contained inflationary pressures.

In a more negative scenario, oil prices could rise to 100 dollars in 2026, pushing inflation up to 5.4 per cent before easing.

In an extreme scenario, the IMF warned that oil prices could climb as high as 110 dollars in 2026 and 125 dollars in 2027, with inflation reaching 5.8 per cent and 6.1 per cent respectively.

The fund highlighted that emerging market and developing economies are expected to face the most acute pressures, particularly those dependent on energy imports.

Turning to Europe, the IMF said the euro area economy will slow to 1.1 per cent in 2026, down from 1.4 per cent in 2025 and below earlier projections.

Inflation in the euro area is expected to rise to 2.6 per cent in 2026, up from 2.1 per cent last year.

Moreover, the fund indicated that interest rates may need to increase further, with the European Central Bank potentially raising its deposit rate by 50 basis points during 2026.

“The impact of the war will add to the prolonged effects of rising energy prices since Russia’s invasion of Ukraine, burdening manufacturing and adding pressure from the real appreciation of the euro,” the IMF said.

The IMF further stated that the euro area remains particularly vulnerable to energy price shocks, given its reliance on imported energy.

Globally, the economic impact of the conflict is expected to be most severe in the Middle East and Central Asia, where growth projections have been cut to around 1.9 per cent.

Saudi Arabia is forecast to grow by 3.1 per cent in 2026, a downward revision of 1.4 percentage points compared with January estimates.

Among major economies, US growth is expected to reach 2.3 per cent, albeit slightly revised downwards.

China’s growth is projected to slow to 4.4 per cent, also marginally below previous forecasts.

The United Kingdom is expected to see a sharper slowdown, with growth revised down by 0.5 percentage points to 0.8 per cent in 2026.

The IMF stressed that geopolitical fragmentation, high public debt and weakening policy credibility are adding to global vulnerabilities.

It added that defence spending is rising sharply amid geopolitical tensions, which may support short term growth but also increase inflation and fiscal pressures.

The report noted that large defence spending increases typically raise public debt by around 7 percentage points within three years, while worsening external balances.

In wartime conditions, the impact is even more pronounced, with public debt rising by about 14 percentage points and social spending declining.

The IMF also warned that armed conflicts leave long lasting economic scars, with output losses exceeding those seen in financial crises or natural disasters.

It said recoveries tend to be slow and uneven, relying heavily on labour while capital and productivity remain subdued.

The fund concluded that strong policy coordination, credible frameworks and international cooperation will be essential to navigate the current environment and support long term stability.