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Albania, Bulgaria, Egypt and Georgia are among the economies most affected by the Trump administration's recent increase in tariffs on steel and aluminum.
The European Bank for Reconstruction and Development (EBRD) has lowered its regional economic growth forecast for 2025 by 0.3% (pp) from its September 2024 outlook.
Growth across the economies where the bank operates - emerging Europe, Central Asia and the Southern and Eastern Mediterranean (SEME) region - is now forecast to reach 3.2% in 2025, before rising to 3.4% in 2026, according to the latest Regional Economic Outlook report.
The report highlights subdued global growth, the gap between the economic performance of advanced European countries and the US, as well as the unpredictable impact of policies pursued by the new US administration under President Donald Trump.
"History is about the external environment and not about developments in our countries," said EBRD Chief Economist Beata Javorcik in an interview with IntelliNews.
"Global growth is subdued by historical standards, but what matters for our region is the divergence between the performance of the US and advanced Europe," Javorcik said. According to her, there are several domestic factors responsible for the growth.
Trade and investment risks
The report warns that potential US tariff increases and retaliatory measures could disrupt global supply chains and deter investment. A scenario in which the US raises tariffs on all imports by 10 percentage points could shave 0.1% to 0.2% off GDP growth in EBRD regions in the short term.
Slovakia and Hungary, which have large car and auto parts industries, as well as Jordan and Lithuania are among the most vulnerable due to their trade exposure to the US.
Furthermore, Albania, Bulgaria, Egypt, and Georgia are among the economies most affected by the Trump administration's recent increase in tariffs on steel and aluminum.
For the emerging Europe region, Javorcik noted that "a much larger impact could come indirectly through the German economy," given Germany's dependence on car exports to the U.S. and the importance of Europe's largest economy as a trading partner for Central and Southeast European countries.
Uncertainty over trade policies is also expected to affect investment in the region, which has previously benefited from the restructuring of the European supply chain.
"The weakness of the Western European economy, especially Germany, affects the level of investment.
"I think many investors would wait to see the approach before committing to large investments," Javorcik said.
Regional inflation has moderated, falling from a peak of 17.5% in October 2022 to 5.9% in December 2024.
However, the report highlights fiscal weaknesses. Interest rates have fallen more slowly than expected, adding to pressure on government budgets, stretched by debt-servicing costs and rising defense spending.
Lebanon, Mongolia, Tajikistan and Uzbekistan are particularly vulnerable due to high levels of short-term debt, the report said.
Geopolitical reset
The EBRD report argues that rising geopolitical tensions have reshaped trade and investment flows.
"We talked about fragmentation, about dividing the world into two blocs. Now we can talk more precisely about reconfiguration," Javorcik said.
India has emerged as a major beneficiary of this reshuffle, attracting increasing Western investment, particularly from the US.
Meanwhile, “connector” economies – a phrase coined by the International Monetary Fund (IMF) – have benefited from ties to rival geopolitical blocs. FDI into these economies has increased.
"The UAE, Saudi Arabia and Egypt are getting FDI from everywhere – from the US, from the West, from China, from non-aligned countries. These three countries accounted for 10% of Greenfield FDI projects last year," Javorcik said.
She identifies emerging connecting economies in Central Asia. "Two countries in our portfolio are also seeing growth: Kazakhstan and Uzbekistan," she said.
Regional growth prospects
The EBRD forecasts GDP growth of 2.7% in 2025 and 2.8% in 2026 in Central Europe and the Baltic States, supported by resilient labor markets but constrained by weak external demand and sluggish investment.
A modest recovery is expected in the southeastern EU economies, which are expected to reach 2.1% in 2025 and 2.4% in 2026.
In the Western Balkans, growth is forecast at 3.6% in both 2025 and 2026, despite tight labor markets and reduced public investment. /Adapted from Pamphlet/
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