Nicosia, Cyprus. The Central Bank of Cyprus warned on Tuesday that the ongoing war in the Middle East and related geopolitical uncertainty, including a sharp rise in oil prices, are expected to have a direct negative effect on the Cypriot economy, mainly in the short term.
It said inflation is set to rise in 2026 and forecast economic growth of 2.7% in 2026, down from 3.8% in 2025.
Growth outlook through 2028
The Central Bank’s projections, covering the period to 2028, indicate the slowdown is expected to be temporary. Growth is projected to recover to 2.9% in 2027 and rise to 3.1% in 2028 as conditions stabilise.
It said the near-term outlook remains constrained, particularly for sectors exposed to external demand and foreign investment.
Sectors exposed to external shocks
The Central Bank said tourism, shipping, construction and real estate are among the most vulnerable sectors and are “expected to be affected in the short term” due to their reliance on international flows.
It also said services exports are likely to weaken as global uncertainty dampens demand, adding pressure across key components of economic activity including consumption, investment and trade.
Conflict assumptions and domestic resilience
The baseline scenario assumes the conflict will last around two months at high intensity before easing, though the Central Bank said the scale of the impact will depend on how long and how severely the situation persists.
It said domestic demand is expected to provide some resilience, with rising real household income and a strong labour market projected to support private consumption through 2026 to 2028. Large-scale investments linked to infrastructure and reform programmes are also expected to sustain activity, although their effects may materialise more slowly.
Labour market and unemployment
Unemployment is forecast to remain stable at around 4.5% over the three-year period, reflecting what the Central Bank described as the continued “resilience” of the labour market despite a slight slowdown in job growth in 2026.
How do you expect higher oil prices and geopolitical uncertainty to affect your household or business in the coming year?