Cyprus economic sentiment improves but growth outlook weakens

The Economics Research Centre of the University of Cyprus (CypERC) has reported that economic sentiment in Cyprus improved in April 2026, while warning of slowing growth momentum and rising uncertainty.

Specifically, the Economic Sentiment Indicator rose by 2.1 points compared with March, driven mainly by less negative business sentiment in the services sector.

Despite this increase, the indicator remained below its historical average of 100 points, signalling weaker underlying economic momentum.

The improvement in services confidence was largely attributed to a significant upward revision in turnover expectations, alongside a more modest improvement in assessments of recent turnover performance.

However, business confidence in services remained relatively low, particularly among firms in hospitality services, reflecting ongoing sectoral challenges.

In contrast, the retail trade sector recorded a sharp decline in confidence, as firms reported deteriorating views on both recent and expected sales.

Confidence in the construction sector also weakened slightly, with firms expressing more negative assessments of current order book levels.

The industry sector experienced a more pronounced decline in confidence, driven by weaker order books and lower production expectations.

At the same time, consumer confidence continued to fall, with households expressing increasingly negative views on their financial situation and showing reduced willingness to make major purchases for a fourth consecutive month.

The Economic Uncertainty Indicator declined in April but remained at relatively elevated levels, highlighting persistent uncertainty across the economy.

Business uncertainty decreased in retail and services, although it remained high, especially among firms in hospitality and financial services.

Uncertainty increased further in construction and industry, as well as among consumers, particularly those in low-income households.

In a separate outlook report, the economics research centre projected that economic growth in Cyprus will slow in the coming years, reflecting external pressures and domestic challenges.

Real GDP growth is expected to moderate from 3.8 per cent in 2025 to 2.9 per cent in 2026, before improving slightly to 3.1 per cent in 2027.

These projections represent downward revisions of 0.6 and 0.3 percentage points respectively compared with earlier forecasts.

The weaker outlook is primarily attributed to economic headwinds linked to escalating tensions in the Middle East, as reflected in leading indicators.

Monthly data, particularly for March, point to weakening demand, especially external demand for services, alongside rising uncertainty and increasing price pressures.

Despite these challenges, strong growth in the fourth quarter of 2025, robust public finances and low unemployment are expected to cushion the impact of recent shocks.

These shocks include the Middle East conflict and the foot-and-mouth disease outbreak, both of which are affecting economic activity and employment.

The Cypriot economy maintained solid momentum in 2025, with GDP growth reaching 3.8 per cent, only slightly below the 3.9 per cent recorded in 2024.

Growth accelerated to 4.5 per cent year-on-year in the fourth quarter of 2025, up from 3.6 per cent in the previous quarter.

Across all sectors, gross value added increased, with notable improvements in construction, while information and communication remained strong and non-business services showed some weakening.

Consumption growth slowed in late 2025 due to weaker private consumption, although government spending increased.

Investment declined year-on-year in the fourth quarter, driven by reductions in machinery, equipment and intellectual property products, despite a strong rise in construction investment.

Although export growth slowed, net exports contributed positively to overall economic expansion as imports declined.

Data for the first quarter of 2026 indicate a softening in demand, with slower growth in retail trade, card transactions, vehicle registrations and property sales.

Tourist arrivals declined sharply in March on a year-on-year basis, while registered unemployment rose slightly for the first time in three years.

Inflation, as measured by the Consumer Price Index, increased to 0.6 per cent in the first quarter of 2026, compared with minus 0.5 per cent in the previous quarter.

This increase was driven mainly by rising prices for local agricultural goods and petroleum products, alongside continued pressure in certain service categories such as home repairs and restaurants.

Survey data also point to deteriorating confidence and rising uncertainty, with the sentiment indicator falling below its long-term average in March for the first time since 2022.

Employment expectations weakened significantly, particularly in the services sector, while price expectations increased.

Fiscal performance remained strong, with a budget surplus recorded in the first two months of 2026, although smaller than in the same period of 2025.

Government revenues and expenditures both increased, with spending rising at a faster pace.

Public debt continued on a declining path, supporting investor confidence and economic resilience.

Interest rates in the euro area remained unchanged since July 2025, while domestic lending rates stabilised or declined slightly.

Loan growth strengthened in early 2026, supported by robust domestic deposits and a strong banking sector, although new lending showed weaker growth due to reduced business loans.

The ratio of non-performing loans continued to decline, reinforcing financial stability.

Looking ahead, inflation is expected to rise sharply, increasing from 0.1 per cent in 2025 to 2.7 per cent in 2026 before easing to 1.8 per cent in 2027.

These projections represent significant upward revisions compared with earlier estimates, reflecting higher oil prices linked to geopolitical tensions and rising domestic food prices.

International oil prices surged in March, with Brent crude rising by nearly 60 per cent year-on-year, while energy prices remained elevated into April.

Domestic food prices also increased rapidly during the first quarter, contributing to inflationary pressures.

Consumer and business expectations for prices rose further, indicating a broad-based increase in inflationary dynamics.

The outlook for growth is subject to significant downside risks, particularly from prolonged geopolitical tensions, weaker external demand and potential disruptions to tourism.

Additional risks stem from slower growth in trading partner economies, tighter financing conditions and possible fiscal pressures.

At the same time, upside risks could emerge from resilient domestic demand, ongoing investment projects, the green transition and supportive fiscal measures.

Inflation risks are tilted to the upside, particularly if geopolitical tensions persist and continue to drive up energy and commodity prices.

A prolonged period of high prices could trigger second-round effects, reinforcing inflationary pressures in an environment of low unemployment.

Conversely, weaker demand, fiscal interventions such as fuel tax reductions, and the adoption of green technologies could help contain inflation.

Broadly, economics research centre concluded that Cyprus faces a period of slower growth, rising inflation and heightened uncertainty, with external factors playing a decisive role in shaping the outlook.