The strengthening of domestic demand is the main driver of economic growth, both for 2025 but also for the three-year period 2026-2028 with external demand also having a positive, but more limited, contribution.
Growth in private consumption, strong investment activity, rising public consumption and positive net exports supported the economy's growth rate, according to the Central Bank's analysis. Private consumption increased by 3.3%, compared to 4% in 2024, as the improvement in real disposable income of households and the conditions of almost full-time employment in the labour market boosted consumer spending.
The same trend is estimated to continue in the period 2026-2028. The Central Bank forecasts that domestic demand will continue to be mainly supported by resilient private consumption, which is expected to be supported by further growth in household real disposable income and the maintenance of a strong labour market.
These factors are estimated to significantly offset the effects of increased inflationary pressures, keeping consumption on an upward trajectory. In addition, despite the pressures exerted by geopolitical uncertainty on investment activity, a substantial strengthening of domestic demand is expected from the ongoing large private non-residential investments. While the timeline for their implementation may be affected by the crisis in the Middle East, these projects are not foreseen to be cancelled, given the transitory nature of geopolitical instability and the long-term horizon of their completion.
And investments
In its analysis, the Central Bank argues that in 2025, investment also gave a significant boost to growth, which, excluding the impact of Special Purpose Entities (SPDs), increased by 6.2%. The increase is mainly attributed to the strengthening of public and non-residential private investment, while the contribution of investment in housing was also positive. A positive, but comparatively smaller, contribution also came from public consumption, which increased by 2%, compared to 1.6% in the previous year, mainly due to the increase in staff salaries.
Net exports, adjusted for the impact of EPAs, also contributed positively to economic growth, in line with the improvement in the trade balance. This development is due to a higher growth rate of exports (5%) compared to imports (2.5%).
Trade – transport
On a sectoral side, economic activity strengthened in all key sectors of the economy in 2025, according to the Central Bank. The largest contribution to GDP growth was made by the sectors of trade, transport, hotels and restaurants, with a contribution of 1.5 percentage points, reflecting the dynamics of private consumption and tourism. This was followed by the information and communication sectors, with a contribution of 0.9 percentage points, supported by the further development of activities of companies of foreign interests (headquartering), especially in the technology sector. The construction sector contributed 0.3 percentage points, while the professional services and financial activities sectors contributed 0.2 percentage points each.
The Central Bank reports that the latest qualitative indicators (soft data) for the second quarter of 2026 indicate a slowdown in economic activity. As can be seen from the evolution of the Business Cycle Index (TEC), as well as the individual confidence indicators, the Cypriot economy has been negatively affected by recent developments in the Middle East. Specifically, the TEC during the April-May 2026 period stood at 99.5, falling below the average of the first quarter of 2026. The deterioration is recorded in all the individual indicators of the TEC.
