Cyprus economy resilient despite Middle East tensions, says analyst

The Cyprus economy continued to demonstrate resilience in March despite a more challenging external environment shaped by regional instability, according to Kostantino Vrachimis, manager of economic research at Eurobank.

In a piece of analysis released this week, Vrachimis explained that although the economy entered the year on a strong footing, conditions have become increasingly demanding due to geopolitical developments in the Middle East, which have heightened uncertainty and shifted risks to the downside.

“The Cyprus economy entered March 2026 in a position of relative strength, yet the external environment has become more demanding,” he said.

Vrachimis indicated that Cyprus still compares favourably with the euro area, pointing out that its growth performance, labour market strength and pace of disinflation remain relatively robust.

He added that this relative strength provides a more solid starting position than that of many other European economies, helping to cushion external pressures.

“Cyprus continues to compare favourably with the euro area in terms of growth performance, labour-market resilience and the pace of disinflation,” he stated.

He went on to explain that the impact of the Middle East conflict is expected to affect Cyprus primarily through indirect transmission channels, rather than through immediate direct disruption.

“The impact of the Middle East conflict on Cyprus is expected to operate mainly through indirect but economically significant channels,” he stressed.

According to Vrachimis, higher energy and transport costs are already beginning to weigh on households and businesses, reducing purchasing power and raising operating expenses.

He said that “rising energy prices and transport costs are weighing on household purchasing power and increasing cost pressures for businesses”.

He also warned that key sectors such as tourism and aviation remain vulnerable to weaker regional sentiment, while shipping and logistics are encountering additional complications.

In addition, he explained that increased freight costs, higher insurance premia and delays in deliveries are creating further strain, particularly given ongoing concerns around the Strait of Hormuz.

“Tourism and aviation remain exposed to weaker regional sentiment, while shipping and logistics face disruption through higher freight costs, insurance premia and delivery delays,” he said.

Moreover, Vrachimis stressed that Cyprus’ economic structure as a small and open economy makes it especially sensitive to such external shocks, as these can quickly feed through to inflation and business sentiment.

“For a small and open economy such as Cyprus, these external pressures can pass relatively quickly into inflation, confidence and broader business conditions,” he said.

Despite these risks, he said that the current situation does not pose a systemic threat and remains manageable under present conditions.

He highlighted that strong domestic demand, ongoing investment activity and a supportive labour market are helping to sustain economic momentum.

“At this stage, however, the shock appears manageable rather than destabilising,” he explained.

Vrachimis also underlined that private consumption continues to play a central role in supporting growth, reinforcing the economy’s resilience.

“Private consumption remains an important source of support,” he said.

He added that recent economic performance has created positive momentum that continues to carry into 2026, further strengthening the outlook.

“The economy carries useful momentum from the strong performance recorded through late 2025 and into early 2026,” he pointed out.

At the same time, he cautioned that these buffers would be tested if geopolitical tensions were to escalate further or persist for an extended period, which could alter the current balance.

He further stated that while possible negative outcomes remain on the horizon, the economy still has sufficient capacity to absorb a temporary external shock under current assumptions.

“This does not eliminate the downside risks, but it does suggest that the economy retains underlying buffers that can help absorb a temporary external disturbance,” he said.

Turning to domestic developments, Vrachimis said that the foot-and-mouth outbreak represents an additional, though limited, source of economic pressure.

He explained that its overall macroeconomic impact is expected to remain contained, but it could still affect specific sectors.

“While its aggregate macroeconomic impact is expected to remain limited, it introduces an additional source of pressure for agriculture, food supply conditions and selected prices,” he said.

He pointed out that agriculture and food supply chains may face disruptions, with meat and dairy products particularly exposed to price pressures.

“It is not a systemic risk for the economy, but it remains relevant from a sectoral and inflation-monitoring perspective,” he stated.

Vrachimis also emphasised that Cyprus benefits from a strong fiscal position, which provides policymakers with room to respond effectively.

Additionally, he said that the government has already introduced targeted and temporary measures to support households and businesses, including interventions in electricity, fuel, food, tourism connectivity and agriculture.

“Its strong fiscal position has enabled the government to introduce targeted and temporary support measures,” he said.

He added that these policies, combined with ongoing fiscal surpluses, act as an important buffer against external shocks.

“These interventions, together with sustained fiscal surpluses, provide a meaningful buffer against the external shock,” he mentioned.

“The overall conclusion remains cautiously optimistic Cyprus is facing a more difficult environment, but it continues to do so from a position of resilience, adaptability and institutional strength,” Vrachimis concluded.