Renewed tensions in the Middle East have added another layer of uncertainty for Cyprus, with economist Tassos Yiasemides warning that a prolonged crisis could slow the island’s economic growth.

Speaking to the Cyprus News Agency (CNA), Yiasemides said the latest flare-up in US-Iran relations has brought geopolitical risk back to the centre of the global economic outlook, at a time when markets were only beginning to stabilise after years of trade tensions and inflationary pressure.

He referred to the International Monetary Fund’s (IMF) latest forecasts, released on Wednesday, which “limit the expected growth of the global economy to 3 per cent for 2026, emphasising that geopolitical conflicts now constitute one of the greatest risks to international economic stability.”

This renewed instability, according to Yiasemides, is already creating risks through energy, transport and international trade.

“At a time when markets were trying to regain stability after the trade tensions and inflationary pressures of recent years, geopolitical instability in the Middle East is creating new risks, mainly through energy, transport and international trade,” he said.

At the same time, he noted that the IMF has revised its global inflation forecasts upwards, mainly because of higher energy costs and uncertainty in oil markets.

For Cyprus, he mentioned, the concern is not only the crisis itself, but how long it lasts and how strongly it feeds into prices, business costs and global demand.

“It is inevitable that, if the crisis is prolonged and accompanied by the maintenance of high energy prices and a general slowdown in the global economy, there will be a negative impact on the growth rate of the Cypriot economy,” Yiasemides said.

The pressure, he explained, would come through several channels. Production and transport costs could rise, economic activity in Cyprus’ main European markets could weaken, while investors may become more cautious. As a result, growth in the coming months could fall below initial expectations.

Cyprus is especially exposed because of its dependence on imported energy and fuel. Higher international oil prices are gradually passed on to electricity, transport and business expenses, before reaching consumers through the prices of goods and services. The uncertainty could also affect some of the economy’s key sectors, including tourism, shipping and investment, Yiasemides noted.

“The big question is the duration and intensity of the new flare-up, with markets appearing particularly ‘sensitive’ to such events,” he said.

For that reason, he stressed the need for prudent fiscal policy, better management of public spending, faster reforms and stronger protection against external shocks. He also pointed to the need for a more modern social policy, aimed at protecting living standards through targeted measures.

However, Yiasemides also emphasised that “Cyprus is not facing the new uncertainty from a weak position.”

The economy, he said, has “significant fundamentals and can better manage international crises and uncertainty,” supported by fiscal stability, an improved credit rating, a more resilient banking system and continued foreign investment.

These factors, he added, create “a strong protection net against external turbulence,” even as risks from the international environment increase.