The European Bank for Reconstruction and Development (EBRD) has cut its regional economic growth forecast for 2025 by 0.3 percentage points (pp) from its September 2024 outlook, citing weaker external demand in Central and Southeast Europe, as well conflicts within the region. 

Growth across the economies where the bank operates — Emerging Europe, Central Asia and the Southern and Eastern Mediterranean (Semed) region — is now projected to come in at 3.2% in 2025, before rising to 3.4% in 2026, according to the bank's latest Regional Economic Prospects report.

The report, titled “Weaker Momentum Amid Fragmenting Trade and Investment”, highlights subdued global growth, the gap between the economic performance of advanced European economies and the US, as well as the unpredictable impact of policies pursued by the new US administration under President Donald Trump.

"The story is really about the external environment rather than developments in our countries," EBRD chief economist Beata Javorcik said in an interview with bne IntelliNews. 

"Global growth is subdued by historical standards, but what matters for our region is divergence between the performance of the US and advanced Europe."

On the other hand, Javorcik pointed to internal factors in the region that are buoying growth. 

“There are some domestic factors that are responsible for growth. Net exports have been putting downward pressure on growth, but what has been driving growth is the increase in real wages, which fuels private consumption, and in some countries fiscal expenditure,” she said. 

“Tourism is a bright spot. Remittances remain strong. Trade supping the Russian market — exports from Central Asia and the Caucasus to Russia — is stabilising but remains much higher than before.”

Trade and investment risks

The report warns that potential US tariff increases and retaliatory measures could disrupt global supply chains and deter investment. A scenario where the US raises tariffs on all imports by 10 pp could cut 0.1% to 0.2% off GDP growth in EBRD regions in the short term. 

Slovakia and Hungary, which have large car and auto parts industries, as well as Jordan and Lithuania are among the most vulnerable due to their trade exposure to the US.

Additionally, Albania, Bulgaria, Egypt and Georgia are among the economies most affected by recent US tariff hikes on steel and aluminium. 

For the Emerging Europe region as a whole, Javorcik noted that "a much bigger impact could come indirectly via the German economy”, given Germany's reliance on auto exports to the US and the importance of Europe’s largest economy as a trading partner for Central and Southeast European countries.

Uncertainty over trade policies is also set to affect investment in the region, which previously benefited from European supply chain restructuring. 

"The weakness of the Western European economy, particularly Germany, spills over into incentives to invest," Javorcik said. "I think many investors would take a wait and see approach before committing to big investments that are aimed at supplying markets with an uncertain future.”

Regional inflation has eased, falling from a peak of 17.5% in October 2022 to 5.9% in December 2024. 

However, the report highlights fiscal vulnerabilities. Interest rates, including in the US, have declined more slowly than expected, adding pressure on government budgets stretched by debt servicing costs and rising defence expenditures.

Lebanon, Mongolia, Tajikistan and Uzbekistan are particularly vulnerable due to high levels of short-term and US dollar-denominated debt, the report said.

Geopolitical realignment

The EBRD report argues that rising geopolitical tensions have reshaped trade and investment flows. 

"We used to talk about fragmentation, about the world breaking into two blocs. Now it is more accurate to speak about reconfiguration," Javorcik said.

India has emerged as a key beneficiary of this realignment, attracting increased Western investment, particularly from the US. 

Meanwhile, "connector" economies — a phrase coined by the International Monetary Fund (IMF) — have benefitted from ties to rival geopolitical blocs. FDI into these economies has soared. 

“The UAE, Saudi Arabia and Egypt are getting FDI from everywhere — from the US, from the West, from China, from non aligned countries. These three countries accounted for 10% of greenfield FDI projects last year,” said Javorcik. 

She identifies emerging connector economies in Central Asia. “Two countries in our portfolio are also seeing an uptick: Kazakhstan and Uzbekistan,” she said. 

Regional growth outlook

The EBRD forecasts GDP growth of 2.7% in 2025 and 2.8% in 2026 in Central Europe and the Baltic states, supported by resilient labour markets but constrained by weak external demand and sluggish investment. 

A modest recovery is expected in the southeastern EU economies, which are expected to rebound from 1.5% growth in 2024 to 2.1% in 2025 and 2.4% in 2026.

In the Western Balkans, growth is forecast at 3.6% in both 2025 and 2026, despite tight labour markets and reduced public investment spillovers. 

Central Asia's growth is expected to recover from 5.4% in 2024 to 5.7% in 2025 before moderating to 5.2% in 2026, with Kazakhstan and Uzbekistan seeing slower growth in their mining sectors.

Eastern Europe and the Caucasus region will see growth ease to 3.6% in 2025 before rebounding to 4.3% in 2026. Ukraine’s 2025 GDP growth forecast has been revised down by 1.2 pp due to Russian attacks on electricity infrastructure. Its economy is projected to expand by 3.5% in 2025 and 5.0% in 2026, assuming a ceasefire by year-end.

In Turkey, growth is projected at 3.0% in 2025 and 3.5% in 2026, following a slowdown to 2.9% in 2024 due to tight monetary policy. 

In the SEMED region, which is still grappling with conflicts and sluggish reforms, growth is expected to recover from 2.5% in 2024 to 3.7% in 2025 and 4.1% in 2026.