Cyprus economic growth slows to weakest pace in ten quarters

Geopolitical tensions impact tourism and services exports but construction remains key pillar for economic activity in Cyprus Cyprus’ economic growth slowed to its weakest pace in ten quarters during the first quarter of 2026, with Eurobank Research attributing the deceleration primarily to a rebound in imports while forecasting that construction will remain a key pillar of economic activity for the rest of the year. According to the bank’s latest economic analysis, gross domestic product expanded by 3.0 per cent year-on-year in the first quarter of 2026, down from 4.3 per cent in the fourth quarter of 2025 and 3.6 per cent in the first quarter of 2025. Eurobank Research said the slowdown was mainly the result of a less favourable contribution from net exports, despite continued strong trade growth. Exports increased by 10.5 per cent year-on-year, while imports rose by 10.4 per cent, marking a significant shift from the previous quarter when exports grew by 3.4 per cent and imports contracted by 3.9 per cent. The report explained that the sharp rebound in imports largely reflected base effects linked to unusually low investment in transport equipment, including ships and aircraft, a year earlier. Despite weaker external trade, domestic demand strengthened across most components of the economy. Private consumption accelerated to 4.9 per cent year-on-year, compared with 3.6 per cent in the previous quarter, supported by favourable labour market conditions. The analysis pointed out that unemployment fell to a record low of 4.0 per cent for a first quarter, helping to sustain household spending. Government consumption also strengthened modestly, expanding by 4.6 per cent year-on-year, compared with 4.3 per cent in the final quarter of 2025. Gross fixed capital formation declined for a second consecutive quarter, although the pace of contraction eased considerably to 6.9 per cent year-on-year, from 21.7 per cent previously. Eurobank said this improvement also reflected the transport equipment base effects that influenced import figures. Residential construction remained one of the strongest-performing sectors, with housing investment rising by 4.7 per cent year-on-year after increasing by 5.9 per cent in the previous quarter. The bank linked this resilience to strong mortgage lending, which expanded by 23.1 per cent during 2025. By contrast, growth in other construction projects slowed sharply to 0.8 per cent year-on-year, down from 17.5 per cent in the fourth quarter of 2025. Investment in intellectual property products also remained under pressure, falling by 62.3 per cent year-on-year after declining by 70.1 per cent in the previous quarter. Looking ahead, Eurobank Research said the economic impact of the latest geopolitical tensions in the Middle East should remain contained, provided the 60-day ceasefire agreement announced on June 17, 2026 contributes to lasting de-escalation in the Persian Gulf and the wider region. The bank expects tourism and transport to experience the greatest impact, placing pressure on services exports, while information and communications technology, financial services and other business services are expected to remain largely unaffected. After a record year for tourist arrivals in 2025 and 9.1 per cent growth during the first two months of 2026, arrivals fell by 28.6 per cent year-on-year in March and April. However, Eurobank highlighted signs of improvement after the decline eased to 4.9 per cent year-on-year in May, raising expectations of at least a partial recovery during the peak summer season. The analysis warned that prolonged weakness in tourism could spread to logistics, retail trade and other related sectors, affecting employment and household disposable income. Labour market indicators have already begun to reflect these pressures, with registered unemployment increasing by 9.0 per cent year-on-year during April and May, reversing the 2.2 per cent decline recorded in the first quarter. According to the report, the increase in unemployment was concentrated in tourism, administrative services and logistics-related activities. Eurobank also expects higher inflation to weigh on consumer spending. The bank pointed to the flash estimate showing inflation accelerating to 4.0 per cent year-on-year in June, up from 0.9 per cent in February, as higher energy costs increasingly feed through into services prices. It said these pressures should be partly offset by government measures aimed at limiting imported inflation and by the stronger cost-of-living allowance (CoLA) adjustment, which increased to 90 per cent from July, compared with 66.5 per cent in previous years. The report added that slower household consumption growth is likely to reduce import demand, partially offsetting the impact of weaker exports on the external balance. On investment, Eurobank expects construction to continue making a strong contribution throughout the remainder of 2026. The bank pointed to a 48.8 per cent year-on-year increase in building permits during January and February, while the authorised construction area expanded by 56.5 per cent. It also highlighted continued strength in the property market, with property sales volumes increasing by 14.1 per cent year-on-year during January to April and housing credit growth accelerating to 24.5 per cent in the first quarter of 2026. Nevertheless, the report said property sales growth slowed markedly to 4.8 per cent year-on-year in May, mainly because of weaker demand from overseas buyers. Growth in purchases by foreign buyers eased to 9.0 per cent from 21.1 per cent during the first four months of the year, while purchases by Cypriot residents slowed to 2.5 per cent from 9.3 per cent. Even so, foreign buyers remained the primary driver of the property market between January and May, accounting for 61 per cent of the increase in total sales, with around 60 per cent of overseas purchasers coming from outside the European Union. Eurobank Research broadly explained that Cyprus’ macroeconomic environment remains favourable for investment, supported by strong public finances, steadily improving financing conditions, a business-friendly regulatory and tax framework, and the island’s strategic geographical location. The bank further stated that labour shortages remain the economy’s principal structural constraint, with the vacancy rate standing at 2.8 per cent in the first quarter of 2026. It concluded by saying that addressing these shortages through policies that encourage targeted labour mobility and attract skilled foreign workers will be essential to sustaining Cyprus’ medium-term economic growth.