Economic growth across developing economies in Europe and Central Asia is expected to moderate, with the World Bank forecasting regional growth of 2.5% in 2025-26. The slowdown stems from weaker external demand, global uncertainty, and a continued economic decline in Russia. In 2024, the region posted growth of 3.6%, supported by rising real wages, increased remittances, and greater consumer borrowing, but momentum is now expected to ease. Inflationary pressures have also grown, with food and service prices driving inflation to 5% by February 2025, prompting central banks to tighten policy or hold back on rate cuts.
The World Bank report highlights varying growth patterns across sub-regions. Central Asia remains the fastest-growing, with projections of 4.7% in 2025-26, though lower than earlier levels due to weaker oil expansion in Kazakhstan and reduced remittance flows. In the South Caucasus, growth is set to average 3.5%, as earlier benefits from trade and labor inflows taper off. The Western Balkans are forecast at 3.4%, while Central Europe is expected to edge up to 2.7%. Russia’s economy faces a sharper slowdown, with growth estimated at 1.3%, while Türkiye is projected to grow by 3.3%, below its long-term trend amid weak global demand. Ukraine’s growth could fall to 2% as war-related disruptions persist.
According to Antonella Bassani, World Bank Vice President for Europe and Central Asia, sustaining economic momentum requires deeper structural reforms. She emphasized that global fragmentation, weak trade prospects, and financial constraints necessitate a shift toward strengthening the private sector and supporting innovation. The report underscores that middle-income countries aspiring to achieve high-income status must accelerate entrepreneurship, technology adoption, and private sector dynamism. Innovation-led growth, supported by research and development, targeted policies, and better integration of technology and global expertise, is seen as the most sustainable path forward.
Ivailo Izvorski, Chief Economist for the region, stressed that entrepreneurial dynamism and experimentation are critical for productivity gains. Rather than broad support for all SMEs, targeted investments in high-potential, innovative companies that generate jobs and drive transformation are recommended. The report points out the need to improve access to long-term finance and risk capital, as venture funding remains underdeveloped in the region. Strengthening competition is equally vital, with state-owned enterprises often crowding out emerging firms. The update also calls for stronger policies to foster innovation, incentivize R&D, and reduce overdependence on resource reallocation and contract-based production for foreign companies. Human capital development remains a central pillar, with investment in skills, training, and retention of talent seen as crucial to attracting entrepreneurs and supporting the innovation ecosystem.
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