Cyprus’ economy grew by 3.3 per cent year-on-year in the second quarter of 2026, accelerating from 3 per cent in the previous quarter and recording the fourth-highest growth rate in the euro area, as household spending and investment remained strong despite the deterioration in the global economic environment following the outbreak of the US-Iran war, according to Eurobank Research.
The bank’s latest analysis of the Cypriot economy points to resilient domestic demand, a robust labour market and sustained investment, although rising inflation and weaker external balances pose risks to the outlook.
Household consumption increased by 5.4 per cent year-on-year, while gross fixed capital formation rose by 9.4 per cent, making the 2 components the main drivers of growth.
Investment was supported particularly by a 151.9 per cent surge in transport equipment, while residential investment grew at a more moderate pace of 4.3 per cent.
Household spending continued to benefit from favourable employment conditions, with the unemployment rate standing at 3.6 per cent in the second quarter, close to the historical low of 3.2 per cent recorded in the same period of 2008.
Consumer credit grew by 12 per cent year-on-year, while hourly wage costs increased by 3.9 per cent, their strongest rise in 5 quarters.
Eurobank Research noted that private consumption has traditionally been a key and stable driver of economic growth in Cyprus, with the latest figures consistent with previous periods of economic expansion.
Government consumption also supported growth, increasing by 4.5 per cent year-on-year.
Exports rose by 9.6 per cent, driven primarily by services, but the external surplus narrowed by 45.1 per cent as imports increased by 12.9 per cent, largely reflecting higher investment in transport equipment.
Consequently, the external sector acted as a drag on growth, with the increase in imports more than offsetting the contribution from exports.
On the production side, stronger activity in wholesale and retail trade, information and communications technology services, financial and insurance activities, and construction drove the acceleration in economic growth.
Investment and property demand remain strong
Economic momentum appeared to remain robust at the beginning of the third quarter, despite continuing geopolitical tensions in the Gulf, according to the analysis.
Real estate sales increased by 10.7 per cent year-on-year in July and August, bringing growth for the first 8 months of 2026 to 13.7 per cent and putting the market on course for a potential new all-time high.
Demand was also reflected in residential property prices, which rose by 8.5 per cent year-on-year in the second quarter, taking the residential property price index to a record level.
Non-resident buyers accounted for 59 per cent of the increase in property sales between January and August, highlighting the importance of overseas demand to the market’s continued expansion.
Construction activity is expected to remain strong as developers respond to demand, with the surface area covered by construction activity expanding by 43.1 per cent year-on-year between January and May.
Investment in transport equipment and intellectual property is also expected to support capital formation during the remainder of 2026, partly through base effects, whereby comparisons with earlier periods influence the reported growth rate.
Tourism proves more resilient than feared
Export performance has also been more resilient than initially anticipated, despite the challenging geopolitical environment.
Tourist arrivals fell sharply by 28.6 per cent year-on-year in March and April, but the decline subsequently moderated to 1.7 per cent in June and 1.1 per cent in July, before widening slightly to 3.3 per cent in August.
Overall, arrivals were down by 7 per cent year-on-year between January and August, broadly in line with the 4.7 to 5.8 per cent decline forecast in Eurobank Research’s previous Cyprus Insights newsletter.
Under this scenario, tourism activity would remain above 2024 levels despite continuing geopolitical uncertainty.
Real estate and intellectual property services are also expected to continue supporting export growth, providing additional sources of strength beyond tourism.
Inflation poses a risk to household spending
The outlook for household consumption remains subject to competing pressures, with renewed inflationary pressures threatening to erode some of the support provided by employment and wage growth.
Headline inflation accelerated to 5.2 per cent year-on-year in August, up from 4.4 per cent in July, largely because of higher energy prices despite the continued implementation of energy-related support measures.
The report warned that these developments increase uncertainty over the inflation outlook once the support measures are gradually withdrawn.
Labour market conditions, meanwhile, remain broadly supportive, although the picture is not entirely straightforward.
The unemployment rate remained close to historical lows in the second quarter despite a 9.4 per cent year-on-year increase in the number of registered unemployed people.
Encouragingly, unemployment declined compared with the previous quarter even as the labour force expanded by 1.6 per cent quarter-on-quarter.
Non-residents accounted for 65.1 per cent of that increase, suggesting that Cyprus continues to attract foreign workers at a time when businesses face persistent recruitment difficulties.
The job vacancy rate remained elevated at 2.6 per cent in the second quarter, underlining the labour shortages that the country still needs to address.
There were further signs of improvement during the third quarter, as the annual increase in registered unemployment moderated to 6.5 per cent in July and August.
S&P upgrade reinforces positive medium-term outlook
Eurobank Research also pointed to Cyprus’ recent sovereign credit rating upgrade by S&P Global Ratings, which raised the rating to A from A- and assigned a positive outlook, as another indication of the resilience of the economy’s underlying fundamentals.
According to the rating agency, the upgrade reflects continued external and fiscal deleveraging, supported by strong real economic growth.
The combination of robust domestic demand, investment and a supportive labour market suggests that Cyprus has maintained its economic momentum despite the difficult international environment.
However, the outlook will depend partly on whether inflation eases without undermining household spending, whether tourism continues to withstand geopolitical pressures and whether the economy can sustain investment while addressing labour shortages.
The latest figures therefore point to an economy that remains comparatively strong, but whose performance will continue to be shaped by the balance between domestic demand, external developments and the cost pressures facing households and businesses.