Growth is set to slow this year across many developing markets as soaring energy costs and supply chain disruptions caused by the Middle East war weigh on activity, the European Bank for Reconstruction and Development (EBRD) said Wednesday.
Economies in the 41 countries covered by the development finance institution are expected to expand at a slower-than-forecast 3.1% this year, 0.5 percentage points below the level forecast in February.
"This report is a story of the continued energy shock," EBRD Chief Economist Beata Javorcik told Reuters. "It hit at the moment that was challenging for Europe, a moment where the sentiment in European manufacturing has been weak."
The bank flagged slower growth in key nations including Türkiye, Ukraine and Egypt.
But the biggest revisions from its February forecast came in Lebanon and Iraq, slashed by 6 percentage points and 5.1 percentage points, respectively. Both economies are expected to contract this year – Lebanon by 2% and Iraq by 1.5%.
For Türkiye, the bank cut its growth forecast to 3.5% from 4% for 2026 and to 4% from 4.5% for 2027.
It cited rising energy imports, persistent inflationary pressures and Iran war spillover risks on tourism and manufacturing supply chains.
"Disinflation is costly and acts as a brake on the economy, but the cost of not addressing inflation would be much higher," Javorcik said.
Last year, EBRD region economies grew at a quicker-than-expected rate of 3.4% as they rapidly adapted to tariff and trade turmoil.
Inflation
"The conflict in the Middle East has delivered a new shock to regions already navigating weakness in manufacturing industries and fragile fiscal positions," Javorcik said.
"Higher energy costs are squeezing competitiveness, reigniting inflation and tightening fiscal space at a time when many economies can least afford it," she added.
Inflation rose by 1.2 percentage points between February and April to an average of 6.4%, with the bank warning that further food price increases – should higher fertilizer costs hit yields – would be felt most in lower-income EBRD economies.
It also cautioned that higher borrowing costs mean inflation spikes are no longer reducing debt-to-GDP ratios as they did after COVID-19.
The EBRD in April announced it was unlocking 5 billion euros ($5.8 billion) to help shore up economies hit by the Middle East war.
Shift from industry to AI
Energy price spikes this year have stayed below the surge after Russia’s 2022 invasion of Ukraine, but European gas prices are still around five times U.S. levels.
The report says this is already shifting exports away from energy‑intensive sectors, while AI‑related exports from EBRD regions are growing faster – rising 42% year-over-year in Hungary and 21% in Poland in 2025.
"This is a bright spot... the region already has comparative advantage in some of those industries," Javorcik said, adding the AI boom could create opportunities and help cushion a structural adjustment as a result of the energy shock.
Almost two-thirds of EBRD economies, and around a quarter of economies globally, have implemented at least one measure to conserve energy or support consumers in response to higher energy prices.
Javocik warned that removing or lowering taxes on fuel "destroys the incentive for people to buy less and that may exacerbate sort of shortages going forward."