The World Bank Group’s latest Europe and Central Asia Economic Update says economic growth across developing countries in the region is expected to slow significantly in 2026 as the effects of the Middle East conflict, broader geopolitical tensions, and rising trade fragmentation weigh on activity. Regional growth is forecast to weaken to 2.1% this year, reflecting a more difficult external environment and mounting uncertainty. Higher energy costs are expected to reduce household consumption, while businesses may delay investment decisions amid growing risks.
Russia’s economy is projected to slow sharply to 0.8% growth, while growth in the rest of the region is expected to ease to 2.9%. The report notes that many countries in Europe and Central Asia remain vulnerable because of their dependence on imported natural gas, oil, and fertilizers, leaving them exposed to external shocks. In response, the World Bank stresses the need for targeted support measures to protect vulnerable populations while continuing policy reforms that can strengthen job creation, business growth, and long-term resilience.
Across subregions, Central Asia is expected to grow by an average of 4.9% in 2026–27, although this marks a moderation as oil production in Kazakhstan stabilizes. Central Europe is forecast to grow by around 2.4% in 2026 before easing slightly to 2.3% in 2027, with weaker consumer demand partly offset by public investment financed by the European Union. The Western Balkans are projected to post average growth of 3.1% over the next two years, supported by infrastructure spending and strong service exports. Meanwhile, Ukraine’s growth is expected to slow to 1.2% this year as continued conflict, rising energy costs, and fiscal pressures continue to strain the economy.
The report warns that a prolonged or intensified conflict in the Middle East remains a major downside risk for the region. Such a scenario could severely disrupt global supplies of energy and fertilizer, pushing food and fuel prices even higher and causing a deeper slowdown across Europe and Central Asia. This risk is particularly important for economies already dealing with external vulnerabilities and constrained policy space.
The World Bank also highlights that weak productivity growth over the past decade has led many governments in the region to increasingly turn to industrial policy as a way to support economic growth and job creation. However, the report cautions that these policies need to be better targeted and focused on building future competitiveness rather than preserving outdated economic structures. It notes that nearly two-thirds of current industrial policy interventions are concentrated in agriculture and food production, while only a small share is directed toward high-tech or capital goods sectors that could drive stronger long-term productivity gains.
According to the report, the most effective path to stronger growth and employment remains broad-based reforms that modernize the business environment, encourage entrepreneurship, and improve education quality. Where industrial policy is used, it should be limited, temporary, and designed to address clearly identified market failures. The World Bank recommends that such policies support new and dynamic private-sector firms rather than protect incumbents like state-owned enterprises, and that they should reinforce competition rather than weaken it.
