The period of relative stability Cyprus enjoyed in its economic landscape has recently encountered a significant disruption. For about six months, the nation experienced a stable yet elevated sense of economic uncertainty, but this changed in October. The Economic Policy Uncertainty (EPU) index, a crucial measure of economic stability, witnessed a considerable rise to 256.63 in October, up from 202.84 in September.

This index is meticulously compiled by the Economics Research Centre at the University of Cyprus. The Centre not only develops the EPU index for Cyprus but also delves into the broader impacts of economic uncertainty on the Cypriot economy. The analysis presented in this bulletin is part of a research initiative conducted in collaboration with the Cypriot Ministry of Finance.

In a detailed press release, the Economics Research Centre highlighted a noteworthy surge in the EPU index in October. This increase is largely ascribed to the outbreak of hostilities between Israel and Gaza on October 7, 2023. Cyprus's geographical proximity to these conflict zones significantly influences its EPU index, marking a stark contrast to the European EPU index, which has not yet shown signs of impact from the ongoing war.

The concept of the EPU index was pioneered by Baker, Bloom, and Davis in 2016. This index serves as a quantitative tool to gauge economic uncertainty, focusing particularly on the effectiveness of implemented economic policies. An in-depth analysis by the University of Cyprus's Economics Research Centre reveals a notable trend: prior to 2007, economic uncertainty in Cyprus was generally lower and exhibited less volatility. However, post-2008, there was a marked increase in this uncertainty. The most pronounced spikes were recorded in 2012, amidst the banking crisis, in 2020 during the Covid-19 pandemic, and in 2022, influenced by the Russia-Ukraine war.

Through this lens, the recent escalation in October's EPU index is a critical development, signaling new challenges and uncertainties for Cyprus's economy amidst regional unrest.