Economies across Central, Eastern and Southeast Europe are set to maintain solid growth in 2025 and 2026 despite global headwinds including Middle East tensions, the ongoing war in Ukraine and the impact of US trade policy, the Vienna Institute for International Economic Studies (wiiw) said on July 1.

The institute, which tracks 23 countries in the region, said growth would remain robust if geopolitical risks do not escalate further, particularly referring to the conflict over Iran’s nuclear programme and tensions in the Strait of Hormuz.

“However, this is conditional on the conflict over Iran’s nuclear programme not escalating further and spreading into a regional war that would cause oil prices to skyrocket,” said Richard Grieveson, deputy director of wiiw and lead author of its summer forecast.

“Fundamentally, the region has repeatedly proved to be very resilient to external shocks,” Grieveson added.

Diverging performances

wiiw expects EU member states in Central, Eastern and Southeast Europe to grow by an average of 2.3% in 2025, slightly below its previous forecast, before picking up to 2.8% in 2026.

While growth is set to remain solid across much of the region, wiiw noted diverging trends among countries and sub-regions. 

Among the EU member states in the region, Poland, Bulgaria, Croatia and Lithuania are expected to continue to grow strongly, while Hungary, Romania and Slovakia face spending cuts to address high budget deficits, dampening their growth.

Poland’s GDP growth is set to come in at 3.5% in 2025 and 2026, falling to 3.0% in 2027, according to wiiw’s forecasts, making it one of the fastest growing economies across the broader region. Poland is followed closely by Croatia, with forecasted growth of 2.9% in 2025 and 2.8% in 2026.

By contrast, Hungary has the region’s lowest growth forecast for this year at just 0.7%, although growth is projected to revive to 2.2% and 2.0% in the next two years. 

Overall, the EU members in the region are projected to grow at three times the euro area’s forecasted 0.7% growth rate in 2025, and at twice the euro area’s 1.4% rate in 2026. This will enable continued economic convergence with Western Europe, the institute said.

Industry feels the pain 

Industry in key countries including Poland, Czechia, Slovakia, Hungary and Romania continues to feel the impact of weak German manufacturing. However, private consumption is providing a buffer, driven by rising real wages and tight labour markets.

“People in many countries of the region are still spending their additional disposable income, which is boosting the economy,” Grieveson said.

The six countries of the Western Balkans are projected to expand by an average of 3% in 2025 and 3.6% in 2026. Kosovo and Albania are pegged to have the strongest growth this year, with Serbia, currently wracked by student-led protest, expected to see growth rebound in 2026-27. 

Turkey is expected to grow by 3.4% in 2025 and 4% in 2026, according to wiiw. The fastest-growing economy in the broader region is Kazakhstan, where GDP is expected to expand by 5.0% in 2025 and 4.5% in each of the next two years. 

Ukraine’s outlook darkens

The outlook for war-torn Ukraine has deteriorated amid ongoing Russian attacks on critical infrastructure and labour shortages due to mobilisation for the war effort.

“Ukraine is suffering from a shortage of air defence missiles, which is leading to enormous destruction of critical infrastructure by Russian drone and missile attacks. The worsening labour shortage due to mobilisation for the war is also weighing heavily on the economy,” said Olga Pindyuk, Ukraine expert at wiiw.

For 2025, Ukraine’s economy is now seen growing by 2.5%, down 0.5 percentage points from the spring forecast. Inflation has accelerated to around 16%, forcing the central bank to keep the key interest rate at 15.5%.

“This has forced the central bank to leave the key interest rate at a high 15.5%, which is of course acting as a brake on growth,” Pindyuk said.

A poor harvest due to drought and the temporary end of tariff-free access for Ukrainian agricultural products to the EU are adding to the challenges.

“Ultimately, Ukraine’s economic development stands or falls with financial and military support from the West. If Trump were to withdraw this support and the Europeans were unable or unwilling to make up the US shortfall, that would have dire consequences,” Pindyuk said.

Russia’s growth slows

Russia’s economic outlook is also weakening, with growth expected to halve to 2% in 2025, down from stronger expansions over the past two years, as high interest rates and declining oil revenues weigh on activity.

“The growth in industrial production is largely attributable to the arms industry, while many other industrial sectors are stagnating or even shrinking,” said Vasily Astrov, wiiw’s Russia expert.

Although inflation has fallen to around 6%, interest rates remain high at 20% despite a recent one percentage point cut by the central bank.

“High interest rates are stifling the economy because they make loans unaffordable and also create a powerful incentive to hoard money in bank accounts,” Astrov said, adding that there is a rising risk of bankruptcies among firms, including large corporations.

Astrov noted that hopes for a quick easing of US sanctions on Russia have faded, while declining oil prices and the limits of import substitution are further constraining growth.

“Lower oil revenues due to falling prices and the fact that the opportunity to replace imports from the West with domestic production is increasingly reaching its limits,” he said.

Russia’s budget deficit is now expected to widen to 1.8% of GDP in 2025, up from the previously expected 0.5%, but Astrov said the government still has sufficient fiscal buffers and borrowing capacity.

Potential escalation in the Middle East

The report flagged a potential escalation in the Israel-Iran conflict as the biggest downside risk to regional growth, with the possibility of spiking oil prices if the Strait of Hormuz were to be closed to shipping.

“If Tehran were to close the Strait of Hormuz to shipping, that could cause oil prices to skyrocket, which would fuel inflation and hit growth hard,” Grieveson said.

Additionally, the institute warned that US President Donald Trump’s tariff policies and the risk of a trade war between the United States and the EU could indirectly affect the region by reducing European industrial exports and investment flows.

“Direct trade flows between the region and America are negligible. However, the region is likely to suffer from lower US demand for European industrial products and less investment in Central Eastern Europe in the event of high US tariffs being laid against the EU,” Grieveson said.

Despite these challenges, wiiw maintains that Central, Eastern and Southeastern Europe’s economies are well-positioned to continue their growth path, supported by resilient domestic demand and an ongoing catch-up with Western European income levels, provided that major geopolitical shocks can be avoided.