Economic growth in the developing countries of Europe and Central Asia (ECA) is likely to slow substantially this year because of the impact of the conflict in the Middle East, geopolitical tensions, and trade fragmentation, says the World Bank Group's ECA Economic Update, released today.
Regional growth is expected to weaken to 2.1% in 2026. Growth in Russia is expected to slow to 0.8%, while the pace of expansion elsewhere is likely to ease to 2.9% with higher energy costs tempering the growth of consumption and uncertainty affecting investment.
"The region’s resilience continues to be tested, with several countries dependent on imports of natural gas, oil, and fertilizers," said Antonella Bassani, World Bank Vice President for Europe and Central Asia region. "Efforts to address the impact of the crisis will be needed in many countries, with a focus on targeted measures to protect the most vulnerable. Pressing ahead with policy reforms for firm growth and job creation will also help to mitigate crisis impacts and strengthen economic resilience and dynamism."
Growth in Central Asia is expected to slow to 4.9% on average in 2026-27 as oil production in Kazakhstan stabilizes. Central Europe is likely to grow by about 2.4% this year before moderating to 2.3% in 2027, with weaker consumption partly cushioned by EU-funded public investment. Growth in the Western Balkans is projected to average 3.1% over the next two years, supported by infrastructure investment and robust exports of services. Growth in Ukraine is expected to slip to 1.2% this year, weighed down by continued hostilities, rising energy costs, and fiscal pressures.
A protracted and more intense conflict in the Middle East remains a key downside risk, with the potential to severely disrupt global energy and fertilizer supply that can push energy and food prices much higher and dampen regional growth more substantially.
The slowdown in productivity growth across many ECA countries over the last decade has led some policymakers to supplement broad policy reforms with industrial policies—government interventions intended to promote specific sectors, activities, or firms.
In a special analysis on how countries can use industrial policy to speed up economic growth and job creation, the report notes the region's approach would benefit from better-defined targeting and measures that build future competitiveness rather than entrench existing economic weaknesses. For example, nearly two-thirds of all industrial policy interventions currently focus on agriculture and food production, while only 10% target high-tech or capital goods.
"To achieve stronger growth in productivity and jobs, ECA countries could prioritize ambitious policy reforms that modernize the business environment, catalyze entrepreneurship, and improve the quality of education," said Ivailo Izvorski, World Bank Group Chief Economist for the Europe and Central Asia region. "Tailored public inputs—such as industrial parks or special economic zones—are the most important type of industrial policies that can help address well-identified market failures. But industrial policies have to be used sparingly and only temporarily."
Where industrial policy is deployed, the report recommends it should support new and dynamic private-sector firms and ideas rather than protect incumbents—such as state-owned enterprises (SOEs)—and must reinforce, not undermine, competition.
