**Cyprus Economy Shows Signs of Recovery Despite External Pressures**
Cyprus' short-term economic outlook has shown signs of recovery, returning to marginal growth in August 2026, according to the latest Composite Leading Economic Index (CCLEI) released by the Economics Research Centre of the University of Cyprus (CypERC). The CCLEI recorded a year-on-year increase of 0.02 percent, based on revised data, following a series of declines in previous months.
This slight uptick in the CCLEI is attributed to improved performance across several domestic economic indicators. Notable areas of growth include property sales contracts, credit card transactions by Cypriots, retail sales volumes, and temperature-adjusted electricity production. These positive domestic developments have provided a counterbalance to ongoing external pressures that continue to impact the Cypriot economy.
Despite the marginal growth, the economy faces challenges from the international economic landscape. Brent crude oil prices remain significantly higher compared to the previous year, while tourist arrivals have decreased on a year-on-year basis. Additionally, the weighted Economic Sentiment Indicator has deteriorated compared to August 2025, which has limited the overall improvement reflected in the CCLEI.
CypERC's findings suggest a gradual improvement in the short-term economic outlook, although the economy remains under pressure from various external factors, including geopolitical tensions. The Central Bank of Cyprus (CBC) has projected a slowdown in economic growth for the current year, with expectations of recovery in the subsequent two years. The CBC forecasts GDP growth of 2.9 percent for 2026, a decrease from 3.8 percent in 2025, followed by growth of 3.1 percent in both 2027 and 2028.
The CBC has revised its forecasts upward compared to earlier projections made in June, increasing its 2026 GDP growth estimate by 0.4 percentage points and its 2027 forecast by 0.2 percentage points. This revision reflects stronger-than-expected economic momentum, particularly during the second quarter of 2026. The central bank has noted improvements in tourism and robust residential investment as key factors contributing to this positive momentum.
Domestic demand is expected to continue supporting the economy, even amid the ongoing effects of geopolitical conflicts, particularly in the Middle East. Private consumption is projected to remain positive as households benefit from higher real disposable incomes, although inflationary pressures are anticipated to persist. The labor market, along with significant residential and non-residential investment projects, is also expected to bolster economic activity.
The CBC has indicated that the long completion periods of major projects, combined with expectations that geopolitical disruptions will be temporary, suggest that these investments are unlikely to be canceled. However, the main challenge for the economy is expected to stem from net exports, which are forecast to negatively impact growth in 2026. This decline is largely attributed to a decrease in tourism revenue during the first half of the year, exacerbated by the ongoing Middle East conflict. Additionally, higher imports are anticipated as domestic demand remains strong, necessitating more imported services to support related exports.
Looking ahead, the economic outlook is expected to improve in 2027 and 2028, with net exports projected to contribute positively to growth, primarily as the tourism sector recovers further. The combination of the CCLEI's marginal improvement and the CBC's forecasts indicates an economy that is being supported by domestic activity and investment, while remaining vulnerable to external shocks, particularly in energy prices, tourism, and geopolitical developments.
As Cyprus navigates these complex economic dynamics, the data suggests a cautious optimism for the future, with domestic factors playing a crucial role in sustaining growth amid external uncertainties.