European leaders are alarmed at the increasingly warm relations between US President Donald Trump and Russian President Vladimir Putin, but economists are encouraged as even a “quick and dirty” ceasefire deal to the Ukraine conflict will buoy flagging economies in Central and Eastern Europe (CEE).

Emerging Europe’s economic prospects are improving, with growth forecasts upgraded across the region. Analysts at Capital Economics believe that while recovery is underway, significant risks remain—particularly from inflationary pressures, potentially punitive US tariffs and geopolitical uncertainties.

“Poland’s economy will remain an outperformer in CEE in 2025,” said Liam Peach, Senior Emerging Markets Economist at Capital Economics in a note released on March 28. “But inflation pressures will remain strong, and interest rates won’t be cut as quickly as analysts expect.” Polish policymakers are trying to navigate between balancing robust growth with persistent price pressures, complicating the outlook for monetary policy.

Hungary, which has emerged from recession, is also expected to see modest improvement, though its growth will be disproportionately affected by new US tariffs. “Inflation will remain stuck above target this year and the easing cycle will stay on pause,” warned William Jackson, Chief Emerging Markets Economist at Capital Economics. Hungary’s strained relationship with Washington, coupled with ongoing fiscal challenges, is expected to weigh heavily on its economic performance.

The Czechia’s outlook appears more promising, benefiting from stronger growth in Germany as a new wave of fiscal stimulus takes effect. The Capital Economics team noted that, “We have revised up our inflation and interest rate forecasts too,” suggesting that the Czech economy may be more resilient than previously anticipated, provided external conditions remain favourable.

However, Romania’s political landscape presents a more concerning picture as the country approaches a critical presidential election. “A loss of investor confidence in the fiscal or political direction presents downside risks to our market forecasts given the country’s strained balance sheet,” cautioned Nicholas Farr, Emerging Europe Economist at Capital Economics. Political instability could undermine Romania’s ability to maintain fiscal discipline and attract foreign investment.

Turkey’s economic reform agenda, meanwhile, remains on a knife-edge amid recent political turmoil and an apparent drift towards autocracy. Nevertheless, Jackson expressed cautious optimism: “At this stage, we’re inclined to think these political events won’t knock the macro stabilisation programme off track.” Turkey’s ability to sustain its reform efforts will be critical to maintaining financial stability in the medium term.

In Israel, deteriorating security conditions following the collapse of the Gaza ceasefire and ongoing tensions with Hezbollah pose significant downside risks. Capital Economics’ analysts warn that these developments could derail economic recovery efforts and increase pressure on policymakers to tighten monetary policy.

Perhaps the most complex and unpredictable element of the regional outlook remains Russia. While the country’s wartime production has boosted GDP growth, the resulting supply constraints and soaring inflation have created severe economic imbalances. “An end to the war would ease these, but much would depend on the nature of any agreement to halt fighting—and the Western sanctions relief that Russia is able to secure,” the Capital Economics team explained. “Irrespective, we doubt Russia’s geopolitical orientation will shift significantly towards the West.”

The potential cessation of hostilities in Ukraine would be particularly beneficial for the war-torn country itself, but the economic gains for neighbouring states are expected to be more modest. Nevertheless, analysts are not entirely optimistic about the broader regional outlook. “We remain concerned about high inflation across the region and think that interest rates will remain high for longer than most expect,” the Capital Economics analysts concluded.

While some signs of recovery are evident across Emerging Europe, the region’s trajectory remains precarious. Inflationary pressures, political instability, and geopolitical tensions continue to cast long shadows over what might otherwise be a period of renewed growth.

 

Key real GDP and inflation forecasts
	Share of World1)	GDP2)				Inflation2)
		2024	2025	2026	2027	2024	2025	2026	2027
Russia	3.6	4.1	2.5	1.0	1.0	8.5	9.4	5.6	4.8
Turkey	1.8	3.2	3.0	2.8	3.3	58.5	34.0	21.3	16.8
Poland	1.0	2.9	3.0	3.3	3.0	3.7	4.5	3.8	3.0
Romania	0.5	0.9	1.8	2.3	2.5	5.6	4.8	3.8	3.5
Israel	0.3	0.9	3.3	3.8	3.5	3.1	2.8	2.3	2.3
Czechia	0.3	1.1	2.0	2.8	2.8	2.4	2.8	2.5	2.0
Hungary	0.2	0.6	1.5	3.0	2.8	3.7	5.0	3.8	3.3
Ukraine	0.3	4.0	5.5	5.5	5.0	6.5	12.3	6.8	5.8
Slovakia	0.1	2.0	2.0	2.8	2.5	2.8	4.0	3.3	2.3
Bulgaria	0.1	2.8	2.8	3.0	3.0	2.4	3.8	2.8	2.5
Croatia	0.1	3.8	3.5	3.3	3.0	3.0	3.5	2.5	2.3
Lithuania	0.1	2.7	2.8	2.8	2.5	0.7	4.0	2.5	2.3
Latvia	0.04	-0.4	1.3	3.0	2.8	1.3	3.3	2.3	2.0
Estonia	0.03	-0.2	2.3	3.3	3.3	3.5	4.8	3.0	2.5
Emerging Europe3)	8.4	3.2	2.8	2.3	2.3	6.3	7.3	4.7	4.0
Sources: LSEG Data and Analytics, Capital Economics. 1) %, 2024, in PPP terms. 2) All % y/y annual average. 3) Inflation measure excluding Turkey.