Cyprus

Cyprus’s economy maintained solid momentum in 2025, though growth moderated from the strong post-pandemic pace. Real GDP growth proved somehow volatile: activity expanded by +1.1% in Q1, slowed to +0.7% in Q2 and rebounded slightly to +0.9% in Q3. The quarterly pattern reflects resilient domestic demand early in the year, followed by softer external conditions and signs of cyclical cooling. For the full year, growth is estimated at around 3.5%, with a further normalization to +2.4% in 2026 as investment gains offset a gradual normalization in consumption. 

Inflation dynamics were unusually weak. After starting the year around 2% in Q1, consumer prices turned negative in mid-year, falling to −0.1% in Q2 and −0.8% in Q3, bringing the annual average close to zero. The correction was driven by sharp falls in electricity and agricultural products. Food and non-alcoholic beverages also posted significant monthly reductions, exerting the largest negative effect on the index. In contrast, services inflation remained positive, led by restaurants and hotels cushioning the headline decline. Inflation is projected to recover to 1.6% in 2026, supported by stronger domestic demand and fading base effects. 

Despite the cyclical slowdown, Cyprus’ labor market remains structurally tight. Unemployment is near historic lows at 4.8%, and vacancy rates are elevated, particularly in ICT, construction and healthcare. Skill shortages persist, with 60% of firms reporting hiring difficulties. Wage growth has accelerated, supported by strong productivity gains and the Cost-of-Living Allowance (COLA) mechanism, which automatically adjusts salaries based on past inflation. Since 2023, COLA applies a two-thirds indexation formula, meaning that two-thirds of the previous year’s inflation is reflected in wage increases. While this system protects purchasing power, it also raises unit labor costs, amplifying competitiveness risks for export-oriented sectors and adding pressure on public finances through a higher wage bill. Combined with demographic constraints and limited domestic labor supply, these dynamics reinforce reliance on foreign workers and highlight structural vulnerabilities in Cyprus’ growth model.

The current account deficit remains high (around 7% of GDP) and the NIIP is deeply negative (near −80% of GDP), highlighting the need for continued reliance on foreign capital. Historically, Cyprus' services ecosystem was closely intertwined with Russian capital flows. Since 2022, EU sanctions have led to a significant reduction in these activities, resulting in increased compliance costs and reputational risk. In the meantime, Cyprus repositioned itself towards ICT, fintech and energy, with foreign corporations expanding their operations in Cyprus, attracted by EU market access and favorable regulation. This has reinforced the country's dependence on foreign inflows and anti-money laundering scrutiny. Concurrently, strategic energy projects such as the Great Sea Interconnector and a proposed Israel-Cyprus gas pipeline have the potential to attract capital and expertise, but they may also introduce execution, regulatory and geopolitical risks if schedules are delayed or regional tensions escalate.