Debt-to-GDP ratio to fall below 60 per cent in 2025
Cyprus’ economy is expected to continue growing at a robust pace in 2025 and 2026, according to the European Commission’s Spring 2025 Economic Forecast released on Monday.
Specifically, growth is expected to reach 3 per cent in 2025 and moderate slightly to 2.5 per cent in 2026.
The commission explained that this expectation is underpinned by Cyprus’ resilient domestic demand, a steady services export sector, and a healthy labour market.
The report mentioned that Cyprus’ real GDP grew by 3.4 per cent in 2024, driven primarily by a 3.8 per cent rise in private consumption.
Investment also rose by 2.5 per cent, excluding ship registrations, despite a temporary slowdown in the final quarter due to a construction sector strike.
In addition, net exports turned positive in 2024, bolstered by strong surpluses in tourism, information and communications technology (ICT), and sea transport services.
Private consumption is projected to remain the key growth driver, supported by continued wage increases and falling inflation, which is restoring household purchasing power.
The European Commission stated that “exports of services are also set to remain robust,” especially in sectors such as ICT and tourism.
Investment is expected to gain momentum as major construction projects continue and Cyprus benefits from funding through the EU’s Recovery and Resilience Facility.
Moreover, the ongoing structural transformation of the Cypriot economy is anticipated to attract strong investment into emerging sectors such as ICT, improving productivity.
However, the commission flagged that increased activity by foreign-owned firms will lead to greater repatriation of profits, which could limit the gains from improved trade balances.
Still, the current account deficit is forecast to narrow to 5.9 per cent of GDP by 2026.
Risks to the outlook include broader global trade disruptions, particularly in the sea transport sector, given Cyprus’ exposure to international shipping activity.
Importantly, the report pointed out that despite the United States’ imposition of tariffs on several trade partners, Cyprus is expected to face only marginal direct impact due to its limited goods trade with the US.
The country’s labour market also showed strength, with the unemployment rate falling to a 15-year low of 4.7 per cent by the fourth quarter of 2024.
The decline in labour market pressures is partially attributed to the arrival of foreign workers through ‘headquartering policies’ that attracted international firms to Cyprus.
These inflows are expected to diminish going forward, as most relocations have now taken place.
“Pressure on the labour market is expected to remain limited,” the commission said, as growth moderates and labour needs decline.
Meanwhile, inflation is projected to converge to 2 per cent by 2026. Food and tourism-related prices saw temporary increases in early 2025, due to wage growth and strong seasonal demand.
These pressures are forecast to ease as wages stabilise and global goods and energy prices moderate.
Elsewhere, the report stated that the country’s fiscal outlook remains highly favourable. In 2024, Cyprus posted a headline budget surplus of 4.3 per cent of GDP, with revenues rising more rapidly than expenditures.
This surplus is projected to remain solid, reaching 3.5 per cent in 2025 and 3.4 per cent in 2026.
Spending commitments include state contributions to major energy infrastructure projects such as the LNG terminal and the Great Sea Interconnector, as well as targeted social schemes.
These include the mortgage-to-rent programme for overindebted households and a solidarity fund for individuals who lost their savings during the 2012-2013 financial crisis.
Despite these obligations, revenues are expected to continue outpacing expenditures, thanks to strong economic momentum.
The commission also mentioned that Cyprus’ debt-to-GDP ratio dropped sharply by over 8 percentage points in 2024 to reach 65.3 per cent.
It is projected to decline further to 58 per cent in 2025 and 51.9 per cent in 2026.
“With this fiscal outlook, the risks for public finances appear contained,” the commission stated.
EU outlook more subdued
In contrast to Cyprus’ strong trajectory, the broader EU is expected to experience modest economic growth of 1.1 per cent in 2025 and 1.5 per cent in 2026.
The euro area is forecast to grow by 0.9 per cent and 1.4 per cent in the same years.
Inflation in the euro area is projected to reach the European Central Bank’s 2 per cent target by mid-2025, averaging 1.7 per cent in 2026.
EU inflation will decline to 1.9 per cent by 2026, driven by lower energy prices, improved terms of trade, and continued disinflation in industrial goods.
The EU’s general government deficit is expected to rise slightly to 3.4 per cent of GDP by 2026, while the debt ratio will edge up to around 84.5 per cent.
Despite easing inflation and slight fiscal tightening, ongoing trade tensions, geopolitical uncertainty, and weak investment remain key challenges for the bloc’s recovery.
The commission warned that “an escalation of trade tensions between the EU and the US could depress GDP and rekindle inflationary pressures”.
However, positive developments, including a US-China trade agreement and planned increases in European infrastructure spending, could support EU growth in the medium term.
