The Central Bank of Cyprus (CBC) announced on Thursday an upward revision of its GDP growth forecast for 2024, increasing it by 0.2 percentage points to 3.7%. The positive adjustment is attributed to stronger domestic demand, with private consumption playing a key role, bolstered by the ongoing resilience of the Cypriot economy.

However, forecasts for 2025-2026 have been slightly downgraded, primarily due to rising imports needed to meet elevated domestic demand. Exports, particularly non-tourism services, continue to support growth but are not sufficient to fully offset the increased imports.

Labor Market towards full employment

The labor market remains robust, with unemployment expected to decline to 5% in 2024, down from 5.8% in 2023. This positive trend is projected to persist, with unemployment rates gradually falling to 4.9% in 2025, 4.7% in 2026, and 4.6% in 2027, approaching conditions of full employment.

The reduction in unemployment is closely tied to the economy's growth momentum. Compared to previous forecasts, the unemployment rate for 2024 was revised downward by 0.1 percentage points, reflecting the improved GDP outlook.

Inflation stabilizing towards target levels

Inflation, as measured by the Harmonized Consumer Price Index (HICP), is forecast to decline to 2.2% in 2024 from 3.9% in 2023, aligning with the medium-term target of 2%. This stabilization is attributed to easing external inflationary pressures, such as high energy and raw material prices, as well as the delayed (lagged) impact of the eurozone's monetary policy, which continues to exert a restraining effect.

Wage growth is expected to remain moderate, minimizing its inflationary impact, while the gradual implementation of a green carbon tax from 2025 may lead to marginal fuel price increases.

The normalization of industrial goods inflation, excluding energy, between 2025 and 2027, compared to the high levels of 2022-2023, is also expected to contribute to overall price stability.

Core inflation—excluding energy and food—is projected to decline further from 3.8% in 2023, settling at 2.6% in 2024, 2.0% in 2025, 1.9% in 2026, and 2.0% in 2027. Service price inflation is anticipated to decelerate during the 2025-2027 period.

Compared to September 2024 projections, the slight upward revision of 0.1 percentage points in the 2024 inflation forecast reflects higher-than-expected service price inflation.

Risks and prospects

The economic outlook for 2024 carries balanced risks, while projections for 2025-2027 reflect slightly increased downside risks.

The downside risks include ongoing geopolitical tensions and weaker-than-expected external demand, tied to heightened uncertainty in global trade policy. Domestically, the planned taxation on multinational corporate profits could negatively impact economic prospects, though the extent remains uncertain.

Slower-than-expected easing of financing conditions may also dampen domestic demand.

On the other hand, higher-than-expected private consumption, driven by lower household savings rates, could boost economic performance.

Regarding inflation, risks for 2024 remain balanced, while those for 2025-2027 tilt slightly upward. Upside risks stem from potential geopolitical escalations and uncertainties in global trade policy, such as new tariffs from the US and retaliatory measures by the EU, which could drive energy prices and shipping costs higher, disrupting global trade.

Climate-related impacts, including extreme weather events and the gradual implementation of green taxation, could raise prices in energy, food, and other core inflation categories. Wage growth surpassing expectations and higher corporate profit margins may also exert upward pressure on inflation.

Conversely, inflation could underperform baseline projections due to slower-than-anticipated easing of financing conditions or heightened geopolitical tensions that might unexpectedly weaken the global economic environment.