Resilient consumption helped keep Europe and Central Asia’s developing economies on their feet last year, but a toxic mix of tepid external demand, persistent inflation, and structural weaknesses is now threatening to pull the region into a low-growth trap.

According to the World Bank’s Spring 2025 Economic Update, released on Wednesday, regional growth is expected to decelerate to an average of just 2.5% for 2025 and 2026.

Strip out Russia, and the forecast modestly improves to 3.3%, still well below the 4% average recorded from 2010 to 2019.

From post-pandemic rebound to fragile footing

After weathering global shocks with a stabilised growth rate of 3.6% in 2024—largely thanks to resilient consumer spending, rising remittances, and an increase in real wages—the developing economies of the Europe and Central Asia (ECA) region now face a much dimmer horizon.

Much of the regional slowdown stems from a confluence of global and domestic headwinds. Weaker trade flows with the European Union, persistent uncertainty in global policy, and a general slowdown in key markets are pressing heavily on open economies with limited buffers.

“Global uncertainty, geoeconomic fragmentation and weak expansion among key trading partners are making it more challenging to sustain this growth,” Antonella Bassani, World Bank Vice President for ECA, said.

Which countries are slowing and why?

The World Bank’s figures show that Central Asia, the fastest-growing ECA sub region, is not immune.

Its growth is forecast to ease from strong 2024 levels to 4.7% in 2025–26, dragged by reduced oil sector expansion in Kazakhstan, falling exports, and the tapering of remittance inflows.

Russia faces a sharp downturn, with projected growth of only 1.3%—nearly three times slower than in 2024. Tighter sanctions, rising borrowing costs, and lower energy prices are compounding structural constraints, threatening to push its economy further away from its pre-pandemic trajectory.

Türkiye, navigating a delicate economic rebalancing, is set to expand by 3.3%, a notable improvement on recent years but still trailing its long-term average.

Poland’s outlook remains slightly more upbeat, with growth projected at 3.1%—buoyed by investment backed by European Union funds—though still below its pre-2020 average due to euro area weakness and persistent trade policy risks.

Across the Western Balkans and the South Caucasus, growth is expected to moderate to 3.4% and 3.5%, respectively, while Ukraine’s recovery is likely to slow significantly, with growth projected at 2% amid sustained war-related challenges.

Inflation pressures reshape monetary policy

Price pressures are making a comeback. Inflation in the ECA region surged to 5% year-on-year by February 2025, up from 3.6% in mid-2024. The drivers? Food and service prices, tight labour markets, and strong consumer demand. That has forced several central banks to pause rate cuts or even reverse course, complicating any growth-supporting monetary easing.

The World Bank warns that inflation could remain sticky, fuelled by domestic risks like expansionary fiscal policies and credit growth.

Supply-side disruptions—from commodity market volatility to climate-related shocks—could further amplify these dynamics.

Why reforms matter more than ever

Beyond the cyclical challenges, the report dedicates a significant portion to the structural reforms needed to reignite long-term growth.

“To achieve stronger economic expansion over the long term, it is crucial for the countries in the region to accelerate domestic structural reforms that foster a dynamic and innovative private sector, entrepreneurship and technology adoption,” Bassani said.

A central theme is the critical role of business innovation, productivity, and the dynamism of young firms.

“Innovation and experimentation in business are essential for boosting productivity and a prerequisite for achieving and sustaining high-income status,” said Ivailo Izvorski, World Bank Chief Economist for Europe and Central Asia.

The bank argues that more focus should be given to innovative start-ups rather than the broader small and medium enterprise (SME) sector.

These firms generate jobs and possess growth potential, but face a tough environment with underdeveloped capital markets and limited access to long-term financing.

A lack of competition is also stifling progress. State-owned enterprises still dominate many sectors, crowding out more agile private firms.

Policymakers, the World Bank notes, should prioritise removing barriers to entry, boosting R&D spending, and integrating global technologies to enable firms to move beyond mere production hubs for foreign supply chains.

Stuck in the middle-income trap?

Without urgent reforms, the risk is stagnation. The World Bank cautions that countries which fail to modernise their economic frameworks, broaden their tax base, and invest in human capital could struggle to sustain even modest growth.

For many, fiscal space is shrinking, limiting room for stimulus as public spending needs rise.

To avoid stagnation and move closer to high-income status, the region must prioritise business innovation, competitive markets, and productivity-enhancing reforms. Without these, the promise of convergence with more advanced economies risks slipping further out of reach.