Cyprus' economy is entering the crisis caused by the Middle East conflict on a strong footing, but its impact may be felt through higher inflation and uncertainty in the short term, according to the Commission's 2026 spring forecast.
Headline inflation is forecast to rise to 3.6% in 2026 and then decline to 2.2%, reflecting first the sharp increase and then the gradual normalization of international energy prices.
Household consumption growth is expected to decline as inflation erodes real disposable incomes, but wage adjustment through automatic indexation is likely to provide support.
According to the European Commission, tourism will be negatively affected by the conflict, but exports of services are expected to remain resilient. Fiscal surpluses prevail and the debt-to-GDP ratio fell below the 60% threshold by the end of 2025 and continues its strong downward trend.
The sharp rise in oil prices has caused energy costs to rise, although reductions in VAT and excise duties on energy may help limit further increases in energy prices. The Commission says the weaker outlook for tourism is expected to mitigate inflation in the services sector, as companies could offer more competitive prices to attract inbound tourists.
The budget surplus is projected to decline to 2.1% of GDP in 2026 and 2.5% in 2027, reflecting a burden of 0.7% of GDP, due to the general tax reform that came into force in early 2026.
This tax reform mainly reduces some special corporate tax payments and personal income tax through adjustment of tax brackets and allowances. Partly offsetting this, the corporate tax rate was increased from 12.5% to 15%.
In addition, it is noted, various government measures to address rising energy prices, such as targeted subsidies, as well as reductions in VAT and excise duties, are weighing on the budget.
