Economic growth edges higher for EBRD countries but tariff threat looms

Russia 'may be heading towards stagflation' as war continues Full impact of US tariffs yet to come, EBRD says

People walk past the new headquarters of the European Bank for Reconstruction and Development (EBRD) in Canary Wharf, London, Britain, September 14, 2023. REUTERS

The European Bank for Reconstruction and Development lifted its 2025 growth forecast for the first time in more than a year but warned that the effects of tariffs and war will weigh on growth in 2026.

The report, which covers economies in emerging Europe, Central Asia, the Middle East and Africa, raised the 2025 growth outlook slightly to 3.1%, but noted a growing divergence as emerging European countries' growth lagged expansion elsewhere.

The 2025 estimate excludes the development bank's newest members - Iraq and six Sub-Saharan African countries, including Nigeria, Kenya and Ghana - but they are included elsewhere in the report for the first time.

The latest report, EBRD chief economist Beata Javorcik told Reuters, showed "a story of multiple pressure points, and a story of divergence in performance between emerging Europe and our other regions of operations."

Rising debt, resurgent inflation, prolonged wars and tariffs were menacing all EBRD economies, Javorcik warned. And while US imports from those countries had grown in the first half of the year, that was driven by the first quarter, before tariffs hit.

"Going forward, we are going to see the impact of tariffs biting," she said.

MENACING DEBT PAYMENTS

Debt and the need to cut spending are weighing on growth in EBRD's European countries, including Poland, Hungary and Romania, while countries in Central Asia and Sub-Saharan Africa and Turkey are pegged for faster growth.

But Javorcik said debt payments as a percentage of GDP are rising in most countries, casting a shadow over the long-term sustainability of public finances.

"There has been a shift in the mindset of policymakers globally who suddenly act as if debt sustainability is no longer a concern ... as if everybody has forgotten the recent experience of Greece," she said.

Javorcik highlighted the public debt of EBRD countries as "very high" - roughly where it was in 1990 - and the cost of servicing that debt as becoming a significant item in budgets.

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In extreme cases, such as Egypt, debt-servicing costs stood at about 14% of GDP, compared with about 4% in Hungary and 2% in Poland.

Inflation has also started rising again, reaching 6.4% on average in the EBRD regions as of July 2025. While this is well below the 2022 peak at 17.5%, it is above what the EBRD expected and is increasingly demand-driven, reflecting expansionary fiscal stances.

EBRD cut Ukraine's 2025 growth forecast again, as the grinding war with Russia, about to enter its fourth year, combined with a weak harvest and worsening labour shortages.

Russia's economy is also entering a difficult period, Javorcik said, with stretched public finances and more limitations on oil and gas exports.

"There is an uncomfortable combination of still-high inflation ... and a slowdown in growth," Javorcik said, adding: "Russia may be heading towards stagflation."