Europa Posted on 2025-02-27 13:30:00

EBRD predicts economic slowdown - Influencing factors are weak demand and trade uncertainty

From Kristi Ceta

EBRD predicts economic slowdown - Influencing factors are weak demand and trade

The European Bank for Reconstruction and Development (EBRD) has lowered its regional economic forecast for 2025 by 0.3 percentage points, compared to its September 2024 outlook. Growth across all economies where the Bank invests is now expected to average 3.2 percent this year, before rising to 3.4 percent in 2026, according to its latest Regional Economic Outlook report.

This downward revision stems mainly from weaker external demand in Central Europe, the Baltic States and the south-eastern EU countries. It also reflects the continuing impact of conflicts and the slow pace of reforms in the southern and eastern Mediterranean region.

Ukraine entered 2025 facing weaker economic performance and rising inflation. The bank has revised down its forecast for the country this year as Russian attacks on electricity infrastructure continue to hamper production. Ukraine’s GDP growth is expected to reach 3.5 percent in 2025, before strengthening to 5.0 percent in 2026, assuming a ceasefire takes effect by the end of 2025.

The new report, titled "The Weakest Moment in Fragmented Trade and Investment," highlights the low momentum of global growth and a persistent gap between the performance of advanced European economies and that of the United States.

It cites uncertainty about possible tariff increases on U.S. imports and retaliatory measures from trading partners. According to the report, trade uncertainty alone is enough to discourage investment, weaken production, and disrupt global supply chains. Looking beyond the uncertainty, the short-term impact of tariffs and trade restrictions on individual economies will depend on whether the tariffs are applied universally or only to selected partners.

A scenario in which the United States raises tariffs on all imports by an additional 10 percentage points could reduce GDP in the EBRD regions by 0.1-0.2 percentage points in the short term. Jordan, the Slovak Republic, Hungary and Lithuania are among the EBRD economies most vulnerable to such measures due to their overall trade exposure to the US market. The report also shows that Bulgaria, Slovenia and Romania are most exposed to tariffs on steel and aluminium.

Economic analysis also shows that if tariffs are applied selectively, economies with privileged access to the US market could benefit from trade diversion and increased foreign direct investment (FDI).

Geopolitical tensions have led to a sharp decline in trade and FDI between rival geopolitical blocs, centered around the US-led West and the China/Russia-led East. At the same time, foreign investment from China and the United States in “connector” economies such as Uzbekistan, Vietnam, Mexico, the United Arab Emirates and Saudi Arabia has increased, the report notes.

The EBRD notes that regional inflation has fallen from a peak of 17.5 percent in October 2022 to 5.9 percent in December 2024. However, the inflation rate remains more than 1 percentage point above its pre-pandemic average, with price pressures increasingly driven by demand factors, such as fiscal policies and rapid wage growth.

Although the easing in inflation has been largely in line with expectations, the report notes that interest rates, including those in the United States, have fallen more slowly than expected.

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