​The 2024 European Commission Country Report on Cyprus offers a comprehensive analysis of the nation's economic performance, fiscal health, and structural challenges within the framework of the European Semester. In 2023, Cyprus's economy demonstrated resilience, achieving a real GDP growth of 2.5%, following a robust 5.1% growth in 2022. This deceleration reflects the normalization of post-pandemic recovery and external challenges, including geopolitical tensions. Looking ahead, the economy is projected to expand by 2.8% in 2024 and 2.9% in 2025, driven primarily by domestic demand, with both consumption and investment playing significant roles.

Private investment in Cyprus remains somewhat below the EU average, with a notable concentration in the construction sector. Households account for nearly half of all investments, double the EU average, indicating a strong demand for housing. While foreign investment is increasing across various sectors, particularly real estate, productivity-enhancing investments, such as research and development, remain low. This trend poses potential risks to the country's long-term competitiveness.

The export sector has experienced a slowdown, with total export revenues remaining almost stagnant in 2023 after significant growth in the previous two years. However, the tourism sector showed a remarkable rebound, reaching approximately 97% of 2019 arrival levels and recording an annual revenue increase of over 20%. Conversely, exports of services like legal and accounting declined, partly due to the repercussions of Russia's aggression in Ukraine. Nonetheless, the economy continues to diversify, with ICT and professional services increasing their share in service exports from around 21% in 2016–2019 to nearly 40% in 2023.

The current account deficit widened significantly from 7.9% of GDP in 2022 to 12.1% in 2023, highlighting vulnerabilities such as dependency on imports of oil, raw materials, and consumer goods. Additionally, the repatriation of profits by foreign-owned companies, including banks, has contributed to a growing primary income deficit, which exceeded 10% in 2023. These factors underscore the need for structural reforms to enhance the economy's resilience.

Inflation has shown signs of moderation, decreasing from a peak of 8.1% in 2022 to 3.9% in 2023, primarily due to lower energy prices and monetary tightening. However, core inflation remains elevated, influenced by previous increases in energy and food prices and strong demand for services. Inflation is expected to continue its downward trend, aligning with the European Central Bank's target in the coming years.

The labor market has benefited from the positive economic environment, with employment increasing by 1.5% and the unemployment rate declining to 6.1% in 2023. Employment growth is particularly strong in services sectors such as ICT, retail, and tourism. Wages have also risen, driven by inflation indexation mechanisms and a tight labor market, although wage growth is expected to moderate in line with inflation developments.

Cyprus's fiscal position remains robust, with a general government surplus of 3.1% of GDP in 2023, attributed to strong revenue growth that offset increased expenditures on public wages, pensions, and health. The fiscal outlook is positive, with continued surpluses projected in the medium term. However, challenges persist in effectively targeting energy support measures, as many do not incentivize energy conservation and are not specifically aimed at vulnerable households.

The implementation of Cyprus's Recovery and Resilience Plan (RRP), including the REPowerEU chapter, is crucial for addressing structural challenges and promoting sustainable growth. The plan focuses on diversifying the economy, enhancing energy efficiency, and accelerating the green and digital transitions. However, delays in implementing reforms and investments pose risks to achieving the plan's objectives by the 2026 deadline.

In summary, while Cyprus has demonstrated economic resilience and fiscal strength, it faces ongoing challenges related to investment composition, external imbalances, and structural reforms. Addressing these issues through effective policy implementation and strategic investments is essential for ensuring long-term economic stability and convergence with EU standards.