Saturday, 15 March 2025
The European Bank for Reconstruction and Development (EBRD) has lowered its economic growth forecast for its investment regions in 2025, revising it down by 0.3 percentage points compared to its previous outlook in September 2024. Growth is now expected to reach 3.2% this year before rising to 3.4% in 2026, according to the latest Regional Economic Prospects report.
The downward revision is attributed primarily to weaker external demand affecting central Europe, the Baltic states, and southeastern EU economies. Additionally, ongoing conflicts and a slow pace of reform continue to impact growth in the southern and eastern Mediterranean (SEMED) region.
Ukraine and Broader Economic Pressures
Ukraine’s economic outlook has been revised downward due to persistent damage to its electricity infrastructure caused by Russian attacks, which have hampered industrial production. The country’s GDP is projected to grow by 3.5% in 2025, with a potential increase to 5.0% in 2026, assuming a ceasefire is in place by the end of the year.
The report highlights a broader economic slowdown across EBRD regions, citing subdued global growth and increasing trade and investment fragmentation. It notes a widening performance gap between advanced European economies and the United States, partly due to uncertainty over potential US tariff increases and retaliatory trade measures.
If the United States were to impose an additional 10 percentage points in tariffs on all imports, GDP in EBRD regions could decline by 0.1% to 0.2% in the short term. The economies most vulnerable to such measures include Jordan, Slovakia, Hungary, and Lithuania due to their trade exposure to the US. Meanwhile, Bulgaria, Slovenia, and Romania are particularly affected by the recently announced US tariffs on steel and aluminium.
While trade restrictions present risks, the report also notes that some economies with privileged access to the US market—such as Uzbekistan, Vietnam, Mexico, the UAE, and Saudi Arabia—could benefit from trade diversion and increased foreign direct investment (FDI).
Geopolitical Tensions and Inflation Trends
The EBRD points to rising geopolitical tensions as a key factor driving a sharp decline in trade and FDI flows between geopolitical blocs, with the US-led West and the China-Russia axis increasingly operating in separate economic spheres. At the same time, FDI from the US and China has surged in so-called “connector” economies that serve as intermediaries in global trade.
Inflation in the EBRD regions has eased, falling from a peak of 17.5% in October 2022 to 5.9% in December 2024. However, it remains more than one percentage point above pre-pandemic levels, with inflationary pressures increasingly driven by domestic demand factors such as expansionary fiscal policies and rapid wage growth.
“While inflation has dropped notably, the sources of inflationary pressures have shifted,” said Beata Javorcik, the EBRD’s Chief Economist. “Fiscal policy and wage dynamics now play a much greater role, and the path ahead requires careful policy calibration to ensure a stable growth trajectory.”
The report also highlights fiscal challenges across EBRD regions, with government deficits widening due to rising industrial policy costs, ageing populations, and increased defence spending. Defence expenditures in EBRD economies have nearly doubled over the past decade, rising from 1.8% of GDP in 2014 to 3.5% in 2023, with further increases expected.
Regional Growth Projections
• Central Europe and the Baltic States: Growth is forecast at 2.7% in 2025 and 2.8% in 2026. The downward revision for 2025 reflects weaker demand from advanced European economies, which has affected exports and investment.
• Southeastern EU: Growth slowed to 1.5% in 2024 but is expected to recover to 2.1% in 2025 and 2.4% in 2026.
• Western Balkans: Growth is projected to remain stable at 3.6% for both 2025 and 2026.
• Central Asia: Growth declined to 5.4% in 2024, down from 5.7% in 2023, but is expected to recover to 5.7% in 2025 before moderating to 5.2% in 2026.
• Eastern Europe and the Caucasus: Growth slowed to 3.9% in 2024, with a further decline to 3.6% expected in 2025 before rising to 4.3% in 2026.
• Türkiye: Growth moderated to 2.9% in 2024, down from 5.1% the previous year. A recovery to 3.0% is expected in 2025, followed by 3.5% in 2026 as inflation declines and real wages improve.
• Southern and Eastern Mediterranean: Growth stood at 2.5% in 2024, constrained by conflicts and slow reform progress. A recovery to 3.7% is expected in 2025, followed by 4.1% in 2026.
The report underscores the need for policy adjustments to address structural weaknesses in EBRD economies, particularly in response to evolving geopolitical and trade dynamics. While inflation has eased and investment flows are adjusting to new global patterns, continued vigilance is required to maintain economic stability amid ongoing challenges.
Source: EBRD
