World Bank warns Europe and Central Asia of sharpest growth slowdown in years

Economic growth in the developing countries of Europe and Central Asia (ECA) is likely to slow substantially in 2026 because of the impact of the conflict in the Middle East, geopolitical tensions, and trade fragmentation, the World Bank Group warned on April 8, 2026, according to a press release published alongside the ECA Economic Update. Regional growth is expected to weaken to 2.1% in 2026. Higher energy costs are tempering the growth of consumption, while uncertainty is affecting investment across the region.

Growth in Russia is expected to slow to 0.8% in 2026, while expansion elsewhere in the region is likely to ease to 2.9%. Central Asia is expected to slow to an average of 4.9% 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. This could push energy and food prices much higher and dampen regional growth more substantially. Several countries in the region remain dependent on imports of natural gas, oil, and fertilizers.

Antonella Bassani, World Bank Vice President for Europe and Central Asia region, stated: “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.”

The ECA Economic Update includes a special analysis on industrial policy as a tool to speed up economic growth and job creation. The report notes that nearly two-thirds of all industrial policy interventions in the region currently focus on agriculture and food production, while only 10% target high-tech or capital goods.

Ivailo Izvorski, World Bank Group Chief Economist for the Europe and Central Asia region, said: “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.”

He added that 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. However, he cautioned that industrial policies “have to be used sparingly and only temporarily.”

The report recommends that, where industrial policy is deployed, it should support new and dynamic private-sector firms and ideas rather than protect incumbents — such as state-owned enterprises — and must reinforce, not undermine, competition. 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. Better-defined targeting and measures that build future competitiveness, rather than entrench existing economic weaknesses, are identified as priorities. Pressing ahead with policy reforms for firm growth and job creation is also cited as a way to mitigate crisis impacts and strengthen economic resilience and dynamism. The ECA Economic Update was released on April 8, 2026, in Washington.