The European Bank for Reconstruction and Development (EBRD) has lowered its growth forecasts across its regions of operations for 2024 and 2025, citing a range of economic pressures. In the latest Regional Economic Prospects report released on September 26, the EBRD projects growth of 2.8% for 2024, a slight reduction from its previous estimate of 3.0% in May 2024. The forecast for 2025 has also been revised downward by 0.1 of a percentage point (pp) to 3.5%.

While the growth forecast has been slightly downgraded, signs of easing inflation and a rebound in real wages are positive developments. However, EBRD chief economist Beata Javorcik warned that "ongoing vigilance will be required as economies adapt to challenges related to renewed inflationary pressures, energy security, trade, and financing conditions". 

Regional variations 

The EBRD’s outlook covers Central, Eastern and Southeast Europe, Central Asia, and the Southern and Eastern Mediterranean (SEMED) region, where the bank is active. 

Among these regions, in Central Europe and the Baltic states, growth is expected to pick up from 0.2% in 2023 to 2.3% in 2024 and 3.2% in 2025, despite devastating floods that struck parts of the region this autumn. The forecasts are a 0.1pp upward revision for both 2024 and 2025, which the report says reflects the region’s resilient labour markets. 

Like other countries in the region, Central Europe’s exports have been hit by lower external demand from Western Europe, especially Germany, as well as other factors such as restrictions on exports to Russia and Belarus for the Baltic states.

The expansion this year has been driven largely by domestic consumption. “Countries that saw faster wage growth, expansionary fiscal policies, and used the RRF [Recovery and Resilience Funds) did better … But they are paying a price in terms of fiscal deficits,” said Javorcik in an interview with bne IntelliNews. 

In the longer-term, Javorcik argues that the eastern EU members have to boost their competitiveness. Countries in this region “registered spectacular growth over the last 30 years but those old sources of growth are depleted.”

The EBRD has slightly raised this year’s forecast for the Western Balkans, citing diverse factors, chiefly Albania’s strong tourism season, higher investment in Serbia and robust consumption growth in Montenegro. The region’s GDP growth is expected to speed up from 2.5% in 2023 to 3.4% in 2024 and 3.7% in 2025. 

It is a less positive picture for the southeastern EU region, where growth is pegged to slow from 2% in 2023 to 1.9% in 2024, reviving to 2.6% next year. “This year’s downward revision is due to weak industrial production and lower outsourcing demand,” said the report. 

Growth is also expected to slow in Turkey from 5.1% last year to just 2.7% in 2024, with a modest increase to 3% in 2025, the EBRD said, citing Ankara’s tighter monetary policy.

Similarly, Central Asia's economic growth is anticipated to moderate, decreasing from 5.7% in 2023 to 5.1% in 2024, primarily due to a slowdown in mining operations in Kazakhstan and Uzbekistan, before rising again to 5.9% in 2025. 

In Eastern Europe and the Caucasus, growth is also expected to taper off, falling from 4.4% in 2023 to 3.7% in 2024, before rebounding to 4.1% in 2025. 

Ukraine’s GDP is projected to remain steady in 2024, but the forecast for 2025 has been downgraded, as damage to the country's power infrastructure is expected to hamper production.

“Ukraine was growing very fast in the first quarter, at 6.5%. That was due to greater exports of grain, metals and ores, and military production. This positive growth streak was broken by the bombing of energy infrastructure. More than half of the infrastructure has been destroyed,” said Javorcik. 

Growth in Russia (no longer part of the EBRD’s region of operations) ticked up from 3.6% in 2023 to 4.7% in the first half of 2024, driven by a 10% increase in oil export prices and robust trade with countries not imposing sanctions. However, the growth rate is expected to decline to 3.6% for 2024 and further down to 1.5% in 2025, largely due to workforce shortages.

In the SEMED region, growth is forecasted to edge up from 2.7% in 2023 to 2.8% in 2024, and then to 3.9% in 2025. This represents a downward revision for 2024, due to slower-than-expected recovery in investments, ongoing conflicts in Gaza and Lebanon, and energy supply issues.

Inflation reined in 

While growth projections are dimming, the EBRD highlighted a significant positive trend in inflation. Regional inflation dropped from a high of 17.5% in October 2022 to 5.8% by July 2024. 

Although inflation remains 1.6pp higher than pre-pandemic levels, the decline has helped to boost household consumption. Real wages, which had been suppressed by the pandemic, have also recovered, with wages almost returning to pre-Covid levels.

However, the report notes that disinflation has been uneven. In Egypt, Hungary, Kazakhstan, Moldova, Turkey and Ukraine, cumulative inflation since February 2022 has exceeded 30%, exacerbating cost-of-living pressures.

A new reality 

After a turbulent few years, according to Javorcik, economies in the region “are progressively responding to changing global circumstances”. 

Oil and gas prices soared after Russia’s invasion of Ukraine, but have now stabilised around the average levels seen between 2017 and 2021. However, gas prices in Europe remain disproportionately high, trading at nearly five times the US price. Some economies in the EBRD region are still paying significantly higher import prices for gas than Germany, with a corresponding impact on competitiveness. 

Notably, Armenia has been able to maintain low natural gas prices due to existing contracts, while Croatia, North Macedonia, Slovenia and particularly Ukraine are paying considerably more. 

"The adjustment path will be particularly difficult for economies such as Ukraine, where the war has had devastating impacts on infrastructure," the EBRD said.

Already, economies in Central and Southeast Europe have reduced their dependence on Russian oil, cutting imports from 60% of the total to around 30%.

This shift has been facilitated by increased imports of liquified natural gas (LNG) from the US and Norway, supported by new and expanded terminals in Croatia, Greece, Jordan and Lithuania. Javorcik pointed out that these shifts in energy dependence are "reflective of broader geoeconomic adjustments" that are reshaping the landscape across EBRD regions.

Still, several emerging European economies still depend heavily on Russian oil and gas imports.

Meanwhile, recent changes in global trade have strengthened China's position as a trading partner in the EBRD regions.

In Central Asia, China’s share of imports rose from 14% in 2021 to 25% in 2023, largely replacing Russian imports. For countries like Armenia, the Kyrgyz Republic and Kazakhstan, this trade shift has resulted in substantial growth in exports and imports, increasing by 37% and 64%, respectively.

The EBRD report notes that China has also become a crucial supplier of green technologies to central and southeastern Europe. China’s lower-cost solar batteries, wind turbines, and electric vehicles have become vital in supporting the region's transition to renewable energy. At the same time, foreign direct investment (FDI) from China in sectors related to the green transition has surged, particularly in Hungary and Morocco.