The EBRD has lowered its 2025 growth forecast to 3.2%, down 0.3 points from September 2024, as slowing investment, trade uncertainty, and weaker external demand weigh on the outlook. The Bank warns that US-wide trade tariffs could further weigh on growth.
Global economic headwinds, trade uncertainties, geopolitical tensions, and persistent inflation are reshaping the outlook for economies in the European Bank for Reconstruction and Development (EBRD) regions.
In a report released on Thursday, the Bank has cut its 2025 growth forecast by 0.3 percentage points to 3.2%, citing weaker external demand in central Europe, the Baltic states and south-eastern European countries, as well as ongoing conflicts, and sluggish reforms in the southern and eastern Mediterranean area.
While Inflation has eased from its 2022 peak, fiscal imbalances and trade disruptions are fuelling fresh uncertainties, according to the institution.
Where is economic growth slowing?
The EBRD has revised its 2025 growth forecast downward across most regions, reflecting weaker external demand, slowing investment, and trade uncertainty.
Aggregate growth for EBRD economies is now expected to reach 3.2% in 2025, down from the 3.5% forecast in September 2024.
In central Europe and the Baltic states, GDP is now expected to grow by 2.7%, 0.5 points below the previous forecast, as the slower-than-expected recovery in advanced Europe dampens manufacturing, exports, and investment.
South-eastern EU economies, which struggled with weak external demand and lower investment in 2024, are now projected to grow by 2.1%, a sharp 0.6-point downgrade. The Western Balkans faces a milder revision, with growth now seen at 3.6%, 0.1 points lower than before.
Central Asia remains the fastest-growing EBRD region, though its 2025 forecast has been trimmed by 0.2 points to 5.7%, reflecting slower activity in Kazakhstan and Uzbekistan. Within the region, the Kyrgyz Republic and Tajikistan are set to expand by 7%, leading growth across EBRD economies.
In eastern Europe and the Caucasus, the post-pandemic and wartime trade boom is fading, leading to a 0.5-point cut in the 2025 forecast to 3.6%. The southern and eastern Mediterranean, weighed down by geopolitical instability and sluggish reform progress, is now expected to grow by 3.7%, down 0.2 points.
Turkey’s 2025 growth forecast remains unchanged at 3.0%, with expectations of a recovery to 3.5% in 2026 as inflation moderates and real wages rise.
Trade tariffs to reshape global investment flows
Trade uncertainty is a central risk in the EBRD’s report. A scenario where Washington raises tariffs on all imports by 10 percentage points could shave 0.1 to 0.2% off GDP across EBRD regions in the short term, the Bank estimates.
Economies with strong trade links to the US – including Jordan, Slovakia, Hungary, and Lithuania – could face immediate economic pressure, while Georgia, Albania, Egypt, and Bulgaria are particularly vulnerable to higher US tariffs on steel and aluminium.
The report also notes that some economies with preferential access to the US market may benefit if tariffs are applied selectively. Trade diversion could steer investment toward these countries, boosting foreign direct investment as businesses seek to avoid higher costs.
At the same time, geopolitical tensions have sharply reduced trade and investment between the US-led West and the China/Russia-led East, accelerating the fragmentation of global economic ties. Both the US and China are redirecting capital toward so-called “connector” economies – countries that maintain trade and investment links with both blocs.
Uzbekistan, Vietnam, Mexico, the United Arab Emirates, and Saudi Arabia are emerging as key winners in this shifting landscape, attracting rising levels of foreign investment as global supply chains realign.
Inflation down but not out
After surging to 17.5% in late 2022, inflation across EBRD regions has cooled to 5.9% as of December 2024. Yet, it remains over a percentage point above pre-pandemic levels.
“While inflation has dropped notably, the sources of inflationary pressures have shifted”, says Beata Javorcik, the EBRD’s Chief Economist.
Slower-than-expected declines in interest rates, particularly in the United States, have added complexity to the economic outlook for emerging markets.
Many economies in EBRD regions took advantage of earlier low rates to extend debt maturities and increase local currency borrowing. Still, some remain highly vulnerable to external shocks, particularly Lebanon, Mongolia, Tajikistan, and Uzbekistan, which hold significant portions of short-term and US dollar-denominated debt.
Fiscal challenges and rising defence spending
Fiscal imbalances are another concern. The aggregate fiscal balance across EBRD economies has deteriorated by 2.2 percentage points since the pre-pandemic period, with deficits expected to stabilise at elevated levels in 2025.
The strain comes from multiple sources: rising government spending on industrial policies, the fiscal burden of ageing populations, and a sharp increase in defence expenditures.
Military spending in EBRD regions has nearly doubled over the past decade, climbing from 1.8% of GDP in 2014 to 3.5% in 2023, with further increases likely.
“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”, Javorcik said.
