Growth across the economies where the bank invests is now expected to average 3.2 per cent this year, before picking up to stand at 3.4 per cent in 2026, according to its latest Regional Economic Prospects report by the bank.
That downward revision stems primarily from weaker external demand in central Europe, the Baltic states and south-eastern European Union (EU) countries. It also reflects the ongoing impact of conflicts and the slow pace of reform in the southern and eastern Mediterranean (SEMED) region.
EBRD has revised downwards its regional economic forecast for 2025 by 0.3 pp relative to its September 2024 outlook.
Growth across EBRD economies may now average at 3.2 per cent this year, before rising to 3.4 per cent in 2026.
Rising geopolitical tensions have led to a sharp drop in trade and FDI between rival geopolitical blocs, centred around the US-led West and the Chinese-Russian-led East.
The new report, titled ‘Weaker momentum amid fragmenting trade and investment’, highlights subdued global growth momentum and a persistent gap between the performance of advanced European economies and that of the United States.
It cites growing uncertainty surrounding potential increases in tariffs on US imports and retaliatory measures by trading partners. The heightened uncertainty alone is enough to discourage investment, weaken production and disrupt global supply chains, the report notes.
A scenario in which the United States raises tariffs on all imports by an additional 10 percentage points could reduce GDP in the EBRD regions by 0.1-0.2 per cent in the short term.
Jordan, the Slovak Republic, Hungary and Lithuania are some of the EBRD economies that are most vulnerable to such measures owing to their overall trade exposure to the US market.
The economic analysis also indicates that if tariffs are applied selectively, economies with privileged access to the US market could benefit from trade diversion and increases in foreign direct investment (FDI).
Rising geopolitical tensions have led to a sharp decline in trade and FDI between rival geopolitical blocs, centred around the US-led West and the Chinese/Russian-led East.
At the same time, FDI from China and the United States into ‘connector’ economies like Uzbekistan, Vietnam, Mexico, the United Arab Emirates and Saudi Arabia has surged, the report notes.
The EBRD points out that regional inflation has declined, offering some relief. Inflation has fallen from a peak of 17.5 per cent in October 2022 to 5.9 per cent in December 2024.
But inflation remains more than 1 pp above its pre-pandemic average, with price pressures increasingly driven by demand-side factors such as looser fiscal policies and rapid wage growth.
Although the moderation of inflation has been largely in line with expectations, the report flags the fact that interest rates—including rates in the United States—have been declining more slowly than previously anticipated.
Furthermore, the aggregate fiscal balance in the EBRD regions deteriorated by around 2.2 pps between 2017-19 and 2024 and is expected to stabilise at about this level this year and the medium term. This trend mirrors similar fiscal challenges in the United States, France, Germany and other large economies.
Government deficits are being exacerbated by a combination of factors, including the resurgence of industrial policies amid the fragmentation of trade and investment, the fiscal burden of ageing populations and rising defence expenditure.
Growth in central Europe and the Baltic states is forecast to reach 2.7 per cent this year and 2.8 per cent in 2026, supported by resilient labour markets. However, the projection for this year has been revised downwards owing to the slower-than-expected recovery in advanced Europe, which has dampened manufacturing, exports and investment.
In south-eastern EU countries, growth slowed to 1.5 per cent in 2024, with weaker-than-expected performance being driven by sluggish external demand, a slowdown in investment and reduced fiscal stimulus. Growth is expected to recover to stand at 2.1 per cent in 2025 and 2.4 per cent in 2026.
Growth in the Western Balkans is expected to remain stable at 3.6 per cent in both 2025 and 2026. The downward revision to the forecast for this year reflects weaker external demand and smaller domestic spillovers from public investment projects amid tight labour markets.
Central Asia saw growth moderate to stand at 5.4 per cent in 2024, down from 5.7 per cent in 2023, with the Kazakh mining sector stagnating and Mongolia experiencing extreme weather conditions. Growth is expected to rebound to 5.7 per cent in 2025, before moderating to stand at 5.2 per cent in 2026.
In eastern Europe and the Caucasus (EEC), economic growth slowed to 3.9 per cent in 2024 as the boost from intermediated trade and inflows of labour and capital waned. Growth is expected to moderate further in 2025, reaching 3.6 per cent, before picking up to stand at 4.3 per cent in 2026.
Ukraine’s 2025 forecast has been revised downwards by 1.2 pps owing to damage to electricity infrastructure caused by Russia’s attacks. GDP growth is projected to average 3.5 per cent in 2025, before rising to 5 per cent in 2026 if a ceasefire is in place by the end of this year.
Growth in Turkiye moderated to stand at 2.9 per cent in 2024, down from 5.1 per cent in the previous year, reflecting the tightening of monetary policy with the aim of lowering persistently high inflation. Growth is expected to recover to 3 per cent in 2025 and 3.5 per cent in 2026 as inflation declines and real wages rise.
In the southern and eastern Mediterranean, growth is estimated to have averaged 2.5 per cent in 2024, affected by conflicts and slow progress with reforms. Growth is expected to recover to 3.7 per cent in 2025 and 4.1 per cent in 2026.
Fibre2Fashion News Desk (DS)
