The European Bank for Reconstruction and Development (EBRD) slashed its regional economic forecast for this year by 0.2%, compared to its February 2025 outlook, in its latest Regional Economic Prospects report launched on Tuesday.
The bank now expects growth in the EBRD regions to be about 3% in 2025, before edging up marginally to 3.4% in 2026.
This downbeat forecast is mainly due to the impact of tariff increases and ongoing geopolitical uncertainty on supply chains and trade. Lagging external demand has also had an impact on this outlook.
Strong domestic demand, loose fiscal policies and robust nominal wage growth are also boosting inflation in the EBRD regions. Following a drop to 5.3% in September 2024, average inflation rose to 6.1% in February this year.
Average debt in the EBRD regions is likely to stay more or less the same, at about 52% of gross domestic product (GDP) over the next four years. This outlook however assumes that governments will announce more stringent fiscal policies, which should also include increased industrial policies, defence and interest payments spending, while some expenditure areas see cuts.
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US tariffs have the potential to impact global supply chains, especially in key European economies such as Germany. However, trade diversion, especially through countries with relatively lower tariffs could help offset and distribute the impact of higher US tariffs.
According to the EBRD, “the average effective US tariff on imports from the Bank’s regions is estimated to surge from 1.8 per cent in 2024 to 10.5 per cent, assuming unchanged composition of exports.”
Beata Javorcik, the EBRD’s chief economist, said in a press release: “Although understanding the full macroeconomic effects of the newly announced tariffs will take time, it is already clear that our regions have entered a period of heightened uncertainty and slower growth.
“Reducing trade tensions through constructive dialogue and achieving consensus on trade policy among key stakeholders are crucial, as prolonged uncertainty carries painful economic costs.”
Which EBRD regions are expected to be the most impacted?
The Western Balkans, Baltic states and central Europe are expected to see the largest reductions in growth, according to the EBRD.
The Western Balkans’ GDP is likely to be 3.2% in 2025, before edging up slightly to 3.4% next year, primarily because of Serbian political turmoil as well as spillover effects from decreased growth in more advanced Western European economies.