Growth in EBRD regions slows as Middle East conflict sparks energy shock and disrupts supply chains

• Growth in the EBRD regions for 2026 revised down by 0.5 percentage point to 3.1 per cent
• Middle East conflict drives sharp rise in energy prices and supply-chain disruption, weighing on output
• Average inflation jumps to 6.4 per cent, with energy and food prices expected to keep it elevated

The European Bank for Reconstruction and Development (EBRD) expects aggregate growth across its regions to slow from 3.4 per cent in 2025 to 3.1 per cent in 2026, before recovering to 3.6 per cent in 2027, according to its latest Regional Economic Prospects report. The 2026 forecast marks a downward revision of 0.5 percentage point relative to the outlook published in February 2026, while the projection for 2027 is 0.1 percentage point lower. 

Entitled “Strai(gh)t talk”, the new report identifies the escalation of conflict in the Middle East as the principal shock to the regional outlook. Rising oil and gas prices, disruptions to shipping through the Strait of Hormuz, and the widening gap between European and US energy costs – now exceeding a factor of five for gas – have weighed on competitiveness and damped economic momentum.

Electricity prices in Europe also remain significantly higher than in the United States of America, reinforcing longer-term structural shifts in industrial production towards less energy-intensive sectors. The weak performance of energy-intensive industries has persisted across both advanced European Union (EU) economies and EBRD economies in the EU.

Year-on-year growth across the EBRD regions in the first quarter of 2026 is estimated at 2.9 per cent, with weaker-than-expected performances recorded in Egypt, Kazakhstan, Romania, Türkiye and Ukraine.

In response to the energy price shock, nearly two-thirds of the EBRD economies have introduced at least one policy measure to support consumers or conserve energy, including energy tax reductions, fuel price caps and targeted subsidies.

The conflict has compounded an already difficult external environment. Even prior to the escalation of hostilities, purchasing managers' indices pointed to weak manufacturing momentum amid rising global trade tensions.

As US import tariffs rose sharply in 2025, prompting a significant reorientation of global trade flows, US imports from China dropped and imports from the Association of Southeast Asian Nations (ASEAN) rose. Meanwhile, changes in US imports from the EBRD regions remained modest, on average. The expansion of artificial intelligence (AI)-related supply chains continued to underpin growth globally, with EBRD economies also recording faster growth in AI supply-chain exports relative to other exports.

Inflation across the EBRD regions, which had moderated in late 2025 on the back of positive real interest rates and slower nominal wage growth, reversed course in early 2026. Average inflation jumped by 1.2 percentage points to 6.4 per cent between February and April 2026. This was driven primarily by higher energy and food prices, which account for larger shares of consumer baskets in the EBRD regions than in advanced economies. Currency depreciation against the US dollar has added further pressure in some economies and inflation is now expected to remain higher for longer than previously anticipated.

“The conflict in the Middle East has delivered a new shock to regions already navigating weakness in manufacturing industries and fragile fiscal positions,” said Beata Javorcik, EBRD Chief Economist. “Higher energy costs are squeezing competitiveness, reigniting inflation and tightening fiscal space at a time when many economies can least afford it.”

The fiscal outlook has also deteriorated. The Middle Eastern conflict is intensifying pressure on public finances, particularly in the southern and eastern Mediterranean region and sub-Saharan Africa, where debt-to-gross domestic product (GDP) ratios and interest-payment burdens were already elevated. Tighter global financing conditions have pushed up borrowing costs, particularly in economies with higher levels of debt. The report also examines the European Commission's proposed Industrial Accelerator Act, published in March 2026, which aims to strengthen industrial competitiveness and reduce foreign dependency in strategic sectors. Within the EBRD regions, industrialised economies in emerging Europe are best placed to benefit from the Act's provisions, though the extent of opportunities for third countries will depend on eligibility rules that remain to be determined.

Regional growth projections

• Central Europe and the Baltic states: Growth picked up to 2.6 per cent in 2025 and is expected to reach 2.8 per cent in 2026 before moderating to 2.5 per cent in 2027. The forecast has been revised down due to the impact of the energy shock, partly offset by rising investment ahead of Recovery and Resilience Facility deadlines.
• South-eastern EU: GDP growth decelerated to 1.2 per cent in 2025 and is forecast to slow further to around 0.5 per cent in 2026, revised down on fiscal consolidation and political uncertainty in Romania, before recovering to 2.0 per cent in 2027.
• Western Balkans: Growth slowed to 2.6 per cent in 2025 and is expected to pick up to 2.9 per cent in 2026 – a weaker rebound than previously anticipated – and accelerate further to 3.5 per cent in 2027, supported by major public investment and infrastructure projects across the region.
• Central Asia: Growth reached 6.9 per cent in 2025 and is expected to moderate to 5.6 per cent in 2026 and 5.3 per cent in 2027. The forecast for the Kyrgyz Republic in 2026 has been revised down on the expected impact of new EU sanctions.
• Eastern Europe and the Caucasus: Growth slowed to 2.7 per cent in 2025 and is expected to remain at around 2.8 per cent in 2026, weighed down by higher energy import costs and weaker tourism in Armenia and Georgia, before picking up to 3.9 per cent in 2027. The outlook for Ukrainian growth in 2026 has been revised down to 2.2 per cent on continued disruptions to production and logistics caused by Russia’s invasion, as well as a higher energy import bill and rising inflation.
• Türkiye: Growth reached 3.6 per cent in 2025 and is expected to slow to 3.5 per cent in 2026 before rising to 4.0 per cent in 2027, with forecasts revised down on higher energy costs, significant inflationary pressures and potential spillovers from the conflict in the Middle East.
• Southern and eastern Mediterranean: Growth is estimated to slow from 3.1 per cent in 2025 to 2.5 per cent in 2026, with the sharpest downward revisions in Lebanon and Iraq, the economies most directly affected by the conflict. A recovery to 4.2 per cent is expected in 2027, though risks remain tilted to the downside.
• Sub-Saharan Africa: Growth is expected to moderate from 5.2 per cent in 2025 to 4.7 per cent in 2026 and 4.8 per cent in 2027, revised down on trade disruptions, higher energy import costs and sluggish investment.