Europe and Central Asia Economic Update

Part I: Recent Developments, Policies, and Outlook

Growth across the developing economies of Europe and Central Asia is expected to moderate to 3.3% in 2024 from 3.5% in 2023, with the two largest economies in the region—the Russian Federation and Türkiye—both facing slowdowns. The region’s main growth drivers are private consumption and supportive fiscal policies, although external demand remains less favorable amid weak economic growth in major trading partners, notably the European Union. Inflation fell to 3.6% by August 2024, from 4.6% at the end of 2023, but remains well above the 2.75 average in 2018-19. Most countries across Europe and Central Asia delayed fiscal adjustment, with spending rising substantially because of large increases in public sector salaries and minimum wages, pensions, social benefits, and defense outlays. 

Diminished growth expectations for the region imply slower income convergence with high-income economies. The misallocation and shortage of talent are becoming an increasingly binding constraint, limiting many firms’ ability to innovate, invest as well as bring in modern technologies, capital, and expertise from abroad. Well-educated and productive workers are essential for convergence to high-income status, an ambition of most of the countries in the region.

Part II: Better Education for Stronger Growth

While economic stability has returned to the countries of Europe and Central Asia, growth remains sluggish. Overhauling education systems across the region, particularly higher education, would help to unlock the human talent these economies need to reinvigorate growth and boost convergence with high-income countries. The main challenge that most of the countries in the region face is not enrollment but the quality of education, which has fallen in recent years, particularly for disadvantaged students and students in vocational education. The quality of secondary education has declined but it is higher education quality that is underperforming even more. A mismatch between the supply and demand of skills leads to wasted human potential and contributes to the region’s brain drain.

To reverse this decline in educational quality, governments need to focus on improving teacher training; providing accurate academic information to teachers, principals, and families; updating curricula; investing in educational infrastructure.   Reforms are also needed to improve management and accountability, consolidate university systems, integrate them with research centers, and provide re-skilling opportunities for adult workers.  

GDP Forecast Highlights

• Ukraine: Substantial damage from Russia’s invasion and extensive electricity disruptions are likely to slow growth from 5.3% last year to 3.2% in 2024 and 2% in 2025.

• Russia: Tighter monetary policy and increasingly binding constraints on production capacity and labor resources due to the ongoing war are expected to slow growth in the region's largest economy from 3.6% in 2023 to 3.2% this year and 1.6% in 2025. Growth remains well above the country’s potential because of buoyant consumer sentiment, higher real incomes, and substantial increases in government spending, including on defense and infrastructure. 

• Türkiye: The normalization of monetary and fiscal policies in the region’s second largest economy is helping to restore macroeconomic stability as inflation pressures gradually ease, domestic demand cools, and external vulnerabilities lessen. Growth is set to slow to 3.2% in 2024, from 5.1% in 2023, as the economy rebalances from the consumption-led expansion. Growth of retail sales has already slowed to single digits, while expansion of industrial production has weakened further amid weaker domestic demand and slowing exports.

• Poland: Growth in the region’s third largest economy is expected to jump to 3.2% in 2024, from just 0.2% last year. Rising real incomes and large increases in public sector wages and social benefits supported a rapid recovery of household consumption, which is projected to grow by almost 5% this year, following a 1% drop in 2023. Government spending boosted growth as well amid record high defense outlays and the utilization of previously frozen EU funds. 

• Central Asia: The region is projected to grow by 4.3% in 2024, down from 5.6% a year ago. Growth is forecast to rise to 5% in 2025, driven by a strong rebound in economic activity in Kazakhstan and resumed expansion of crude oil production. 

• Western Balkans: Consumption—buoyed by stronger real incomes and increased government spending on public salaries, pensions, and social benefits—is driving growth up in the Western Balkans from 0.7% in 2023 to 3.3% this year. Investment growth across the region is also expected to strengthen to about 6.5% on average, from 2.7% in 2023. 

GDP Growth Summary 2021-2026