World Bank, June 2024.
Growth in Europe and Central Asia (ECA) is projected to soften to 3.0 percent this year and to 2.9 percent in 2025. The slowdown in 2024 largely reflects decelerations in the Russian Federation and Türkiye. Excluding these two economies and Ukraine, growth is projected to firm this year and next, as inflation eases, monetary policy rates are cut, and the growth of exports, particularly to the euro area, strengthens. Geopolitical developments remain the predominant downside risk to the growth outlook, especially those linked to Russia’s invasion of Ukraine and conflict in the Middle East. Uncertainty about economic policies is also likely to remain elevated. Although the risks of higher-than-expected inflation have decreased, there could still be upward pressure on commodity prices or wages, along with potential new episodes of financial strains.
Recent developments
Growth in Europe and Central Asia strengthened to 3.2 percent in 2023, primarily reflecting a shift from contraction to expansion in the Russian Federation and Ukraine, and a more robust recovery in Central Asia. The regional picture was mixed: growth in Türkiye slowed and activity in Central Europe barely expanded, primarily reflecting stagnation in Poland due to falling real incomes, and amid spillovers from euro area weakness. High-frequency economic indicators, including manufacturing purchasing managers’ indexes and retail sales, suggest a resilient activity in early 2024 in ECA’s largest economies—Russia, Türkiye, and Poland.
In Russia, growth picked up to 3.6 percent in 2023—a 1 percentage point upward revision from January’s estimate. The upgrade largely reflects stronger-than-expected private demand, supported by subsidized mortgages, fiscal measures, and a tight labor market. Increased military expenditures also boosted activity. After cuts in early 2024, oil production hovered around 9.2 mb/d in the second quarter, down by 0.4 mb/d from 2023.
Türkiye’s growth slowed to a still-robust 4.5 percent in 2023. Economic activity has remained resilient into 2024, supported by a significant rise in the minimum wage—the fifth increase since 2022 –and despite monetary policy tightening. Policy interest rates have been hiked nine times since June 2023, from 8.5 to 50 percent, to contain inflation—which remains persistently high, at 75.4 percent year-on-year in May. Large wage increases, currency depreciation, and tax adjustments have contributed to inflation. The region’s median headline inflation fell to 3.7 percent and core inflation to 4.3 percent on a year-on-year basis in April 2024—about one-third of the levels prevailing a year earlier. Monetary policy has shifted toward easing in most countries, with the notable exception of Russia and Türkiye. Real wages rose by 11.8 percent year-on-year in the first quarter of 2024, while the unemployment rate dropped to historic lows in the region.
Outlook
Growth in ECA is projected to decelerate gradually to 3 percent in 2024, 2.9 percent in 2025, and 2.8 percent in 2026. The primary growth drivers in most countries are expected to be private consumption and investment—buoyed by the easing of monetary policies and decreasing inflation—and a recovery in exports, particularly as activity in the euro area firms. The slowdown this year is mainly attributed to decelerations in Russia and Türkiye. Nevertheless, the 0.6 percentage point upward revision for this year since January is mainly due to an upgrade for Russia, reflecting unexpectedly strong activity in late 2023 and early 2024. Elevated uncertainty regarding the evolution of the invasion of Ukraine continues to play an essential role in shaping the regional outlook. Excluding Russia, Türkiye, and Ukraine, growth in the region is expected to accelerate to 3.1 percent this year and 3 .6 percent on average in 2025–26, with growth picking up in about half of ECA’s economies.
Inflation is expected to continue moderating, paving the way for more substantial monetary policy easing. In April 2024, inflation was above official targets in about half of ECA countries, but market-based expectations are consistent with inflation close to targets in most cases by 2025. Despite the need for fiscal consolidation to ensure sustainability, prospects for significant fiscal adjustments in the region appear to be limited, amid many upcoming elections.
Growth in Russia is forecast to decelerate to 2.9 percent in 2024, 1.4 percent in 2025 and 1.1 percent in 2026, near its potential rate. While the carry-over from strong growth in late 2023 and the beginning of 2024 is expected to boost activity throughout 2024, the anticipated tightening of macroprudential measures and the scaling back of the provision of subsidized mortgages are set to temper private demand. Military production is projected to continue supporting activity. Amid ongoing trade diversion, Russia’s trade linkages with China have grown as more Russian trade transactions are being conducted in the Chinese renminbi.
Growth in Türkiye is projected to moderate to 3 percent in 2024 as the tightening of monetary policy feeds through to the economy and contributes to reducing macroeconomic vulnerabilities. However, activity is forecast to increase by 3.6 percent in 2025 and 4.3 percent in 2026, driven by stronger domestic demand and net exports. Inflation will remain above the central bank’s target, easing only to 29 percent on average in 2025. The fiscal deficit is expected to remain elevated, partly reflecting the costs of assisting rehabilitation and reconstruction following the February 2023 earthquakes.
In Ukraine, growth is anticipated to rise from 3.2 percent in 2024 to an average of 5.8 percent a year in 2025–26, under the assumption that active hostilities continue throughout 2024 and subsequently moderate. The recovery will depend, first and foremost, on the evolution of Russia’s invasion, and is expected to be supported by an increase in exports and reconstruction investments. Reconstruction costs are estimated at $486 billion over the next decade, approximately 2.8 times nominal GDP in 2023, and a significant increase from previous estimates (World Bank 2024d). More than 6.4 million people have fled the country. Loss of jobs, incomes and assets, as well as high inflation, have reversed 15 years of poverty reduction (UNHCR 2024; World Bank 2024e).
Output in Central Europe is envisaged to firm to 3 percent in 2024 and 3.5 percent in 2025 before easing to 3.3 percent in 2026. This mirrors the expected pickup in the euro area, and the support from the European Union’s Recovery and Resilience Facility (RRF). Poland’s growth is envisaged to be the main driver of the subregion’s growth, with private demand boosted by disinflation and wage growth. After delays, the country has received its first payment from the RRF. The facility is expected to provide Poland with about €59.8 billion by the end of 2026.
Growth in the Western Balkans is forecast to rebound to 3.2 percent in 2024, to 3.5 in 2025 and 3.8 percent in 2026. Private demand is projected to be the main driver of growth, while the drag from weak net exports is expected to be less significant than in 2023, reflecting a pickup in exports alongside the euro area’s recovery. The new European Union (EU) growth plan for the subregion will enhance economic integration and boost socio-economic convergence (World Bank 2024f).
In South Caucasus, growth is projected to stabilize at about 3.5 percent annually over 2024–26. Azerbaijan is expected to pick up supported by some recovery in hydrocarbon exports, which were notably low in 2023. This rebound is expected to be counterbalanced by the easing of growth in Armenia and Georgia from exceptionally high levels in recent years. Trade diversion, resulting from the invasion in Ukraine, is expected to continue.
Growth in Central Asia is forecast to weaken to 4.1 percent in 2024, before picking up to 4.9 percent in 2025 and softening again to 4.2 percent in 2026. The normalization of financial, trade and tourism linkages with Russia following the invasion is projected to contribute to the slowdown. In particular, remittance inflows from Russia are expected to continue to decline, albeit from elevated levels. The subregion growth profile closely aligns with Kazakhstan’s economic trajectory, influenced by the postponement to 2025 of the expansion of the Tengiz oil field—a project expected to increase oil production by approximately 8 percent.
Between 2011 and 2023, both investment and labor productivity in ECA grew more slowly than during 2000–10 (World Bank 2024g). In the forecast period, however, investment growth in ECA is expected to firm somewhat, particularly in the EU countries of the region and Ukraine. Artificial intelligence (AI) is envisaged to increasingly influence investment strategies. ECA countries in the EU stand to benefit from the EU’s RRF investments in green and digital transitions. Most Central European countries already have developed an AI strategy and exhibit high scores on the Artificial Readiness Index. Central Asia’s readiness more closely aligns with the average for emerging market and developing economies (EMDEs), but the subregion’s countries are working to develop a unified strategy toward AI adoption which will boost their investment in this area.
Source: World Bank‘s World Economic Outlook Report (Global Economic Prospects)