Some of the Central European countries, including Hungary, Romania and Slovenia, have seen their economic prospects sour as trade tariffs bite and Chinese competition increases, squeezing their exports.
This is according to the latest outlook from the European Bank for Reconstruction and Development (EBRD).
Growth in the 43 countries where the EBRD invests picked up from 2.8% in 2024 to 3.3% in the first half of 2025.
After a stronger-than-expected first half of 2025, the organisation forecasts a significant slowdown in growth in the second half of the year across its regions. These include Central Asia, the Southern and Eastern Mediterranean, as well as South-Eastern Europe, Central Europe and the Baltic states. The current outlook excludes recently joined regions such as sub-Saharan Africa and Iraq.
The main risks hampering growth include continued trade tensions and weakening global demand. However, the EBRD expects growth to pick up again in 2026. According to its Regional Economic Prospects report, output is expected to grow by 3.1% this year before accelerating to 3.3% in 2026.
Compared to its previous outlook, this translates to slightly better growth for 2025, and slightly worse for 2026.
Which countries’ prospects have been hit the hardest?
Countries where the EBRD has largely cut its forecast, compared to the one released in May 2025, include mostly its EU members in Central Europe and the Baltic states.
Slovenia’s growth outlook was sharply cut by 1.2% this year, with its economy expected to expand by 0.7%. The country saw a huge decline in its exports to the US in the first half of the year, amounting to 1% of GDP.
Hungary saw its prospects revised downward by 1%, with 0.5% growth predicted this year. Investments in the country have been lagging partially due to frozen European funds. This has been coupled with higher financing costs. Hungary’s output has also been affected by weakness coming from Germany, where the manufacturing sector suffered a sharper contraction than previously estimated, says the report.
Latvia and Estonia also saw a downward revision, 0.9% and 0.8% respectively.
The nine countries comprising the region of Central Europe and the Baltic states are expected to experience growth of 2.4% in 2025 and 2.7% in 2026.
These countries have limited growth in the cards, because of weaker-than-expected external demand, budgetary cuts and higher US tariffs hurting their trade. These impacts could be partly offset by higher infrastructure investment, according to the EBRD report.
European EBRD countries with better prospects include Poland, whose forecast has been revised upward by 0.2%, expecting 2.5% growth this year. And Lithuania’s outlook for 2026 has also been revised upward by 0.6%.
Referring to these two countries, EBRD Chief Economist Beata Javorcik said: “You see that countries that did well are countries that are diversified, larger economies like Poland, so less dependent on exports, countries that invested a lot, particularly public investment.”
Poland’s prospects were boosted by its infrastructure investments, including energy transition projects, as well as rail and defence-related works.
Elsewhere, in Eastern Europe and the Caucasus, Ukraine’s outlook was cut by 0.8% to 2.5% growth this year, due to the impact of ongoing Russian aggression and weak harvests.
Meanwhile, growth forecasts in the South-Eastern EU, including in Bulgaria, Greece and Romania, were cut by 0.3% this year and 0.5% for 2026. Lower exports are being balanced with stronger investment in the region, where Romania is in the weakest position.
The country “will need to fully leverage EU funds to stimulate growth,” said the EBRD report. The bank is expecting an average GDP growth of 1.7% in 2025 and 1.9% in 2026 for the three countries in the South-Eastern EU.
The main risks EBRD countries face in Europe
Trade tensions are one of the pressure points for the regions and notably for the European countries, according to the report.
Nearly all EU exports to the US face a 15% tariff as of the end of August 2025. This gave some economies a short-term frontloading boost in the first half of the year, but in the long run, the duties are expected to hurt output.
“The impact of tariffs is yet to materialise,” Javorcik said.
Meanwhile, European countries are also facing the long-term risk of an increasingly tight trade competition with China.
“China accounts for a quarter of global exports, and it exports more than Germany and the US combined,” said Javorcik. She added that “China and our countries tend to export similar products,” meaning that the country is “slowly becoming a competitor to advanced European countries”.
Over the past decade, China has increased its exports of cars and batteries, goods which also constitute important shares of exports for some economies in EBRD regions.
However, European EBRD countries could also make gains in key export markets, particularly where the US wants to cut dependence on Chinese suppliers.
Meanwhile, fiscal vulnerabilities are also among the risks EBRD countries face in the next two years. A number of economies are shouldering the burden of high costs to service their debts. For European countries such as Hungary, the cost is around 4% of GDP; for Poland and Romania, it amounts to over 2% in 2025.
What could boost European economies?
“The US trade policy may be a threat, but it may also be an opportunity,” explained Javorcik.
She said that while higher US tariffs could hurt European countries’ exports, it also presents an opportunity for Eastern European countries “to export products that previously came from China and which, due to much higher tariffs, have therefore become less competitive”, she said.
The chief economist also highlighted the potential benefits of Chinese investments in European countries.
“If you go back to the Draghi report published a year ago, the Draghi report was suggesting bringing Chinese investment, FDI, in car manufacturing and forcing technology transfer to European companies,” she said.
Meanwhile, in Europe, many see defence spending as a way to boost GDP, but whether increased defence spending could really fuel growth depends on three factors, according to Javorcik.
She suggested that spending on infrastructure is a key move.
“If you devote a good chunk of defence spending, not to core defence, but to everything else that is needed — infrastructure, energy security, IT security — these benefit the private sector and therefore stimulate growth.”
“The second choice you have is how much you import versus buy locally,” she continued, adding that the third most important thing is to invest in “developing the best defence system of tomorrow”, instead of the best defence systems of today.
“The higher the investment in R&D spending, the greater the stimulus for future economic growth,” the EBRD chief economist concluded.
