Europe and Central Asia Economic Update

Part I: Recent Developments, Policies, and Outlook

On average, economic growth across the developing economies of Europe and Central Asia is expected to slow to 2.5% in 2025-26 owing to weaker external demand and a slowdown in Russia.

Risks are heavily tilted to the downside. Heightened global policy uncertainty, trade fragmentation, increased trade barriers, geopolitical tensions, and financial market volatility dominate. Serious challenges could arise from weaker than-anticipated economic expansions in key trading partners, further adverse shifts in global trade policy, and continued softening of commodity prices. Tight labor markets and potential supply-side shocks could exacerbate inflation, but how these factors will develop remains to be seen.

Part II: Accelerating Growth through Entrepreneurship, Technology Adoption, and Innovation

In the current challenging global economic environment, it is crucial for the region to accelerate growth by improving the business environment and fostering buoyant private sector development. Yet business dynamism and economic activity have weakened noticeably since the late 2000s, with productivity growth largely driven by resource allocation across firms rather than innovation. 

The report suggests breaking this cycle by facilitating innovation, enabling the most productive firms, strengthening competition policies, deepening financial markets, and increasing research and development (R&D) investment. By prioritizing these reforms, the developing economies of Europe and Central Asia can encourage an enterprise-driven growth model, which is essential for creating better-paying jobs and achieving and sustaining high-income status.

GDP Forecast Highlights

• Russian Federation: Growth is projected to fall to 1.3% on average over the next two years—nearly three times slower than 2024 and below the 2% average during 2010-19—due to capacity constraints, rising borrowing costs, tighter sanctions, and lower energy prices.

• Türkiye: Growth is likely to stabilize at 3.3% on average in 2025-226—more than two percentage points slower than in 2010-2019, reflecting sluggish external demand and tight policies.

• Poland: The economy is expected to stabilize, with growth averaging 3.1% during 2025-26, driven by strong consumption and a rebound in investment supported by EU funds. However, growth is likely to fall short of the 3.7% average in 2010-19 because of trade policy uncertainty and slow growth in the euro zone. 

• Ukraine: The pace of the country’s economic expansion is projected to slow further to 2% in 2025, before recovering to 5.2% in 2026 conditional on the cessation of military hostilities and reconstruction begins.

• Central Asia: Growth is forecasted to ease to 5.0% in 2025 and 4.4% in 2026, more than a full percentage point slower than 2023. This slowdown reflects a weaker expansion of the oil sector in Kazakhstan as well as declining exports and the normalization of remittances inflows.

• South Caucasus: Growth is projected to average 3.5% in 2025–26, nearly 2 percentage points below the pace of last year’s expansion, as domestic demand, trade, and remittance inflows stabilize in Armenia and Georgia, and growth weakens in Azerbaijan amid declining oil production.

• Western Balkans: Growth is projected to weaken to 3.2% in 2025 before returning to 3.5% in 2026. Domestic political uncertainty, weak manufacturing activity in the euro area, and reduced fiscal support present major constraints to faster growth. 

GDP Growth Summary 2021-2026