Growth in CEE is so far holding up against the Iran energy shock. But the extended-workbench model is faltering.
Growth across most of the economies of Central, East and Southeast Europe remains resilient despite the energy-price shock from the Iran war, though it is slowing. The same applies to the region’s EU member states. But should the war in the Middle East drag on and bring about a severe energy crisis with persistently higher oil prices, Eastern Europe is likely to suffer more acutely. These are the main findings of the new spring forecast from the Vienna Institute for International Economic Studies (wiiw), covering 23 countries in the region.
“For the time being, the impact of the Iran war on EU member states in Eastern Europe remains manageable. However, rising inflation, lower export demand, disrupted supply chains and a further decline in direct investment could have a severe impact,” says Richard Grieveson, deputy director of wiiw and lead author of the spring forecast.
Compounding matters is a substantial loss of industrial competitiveness in recent years, driven by sharply rising labour costs without matching productivity gains, growing competition from China and falling foreign direct investment. “The model that has hitherto been the hallmark of Central Eastern Europe’s success–acting as an extended production line for foreign industrial companies, which manufacture there cheaply on the basis of substantial investments in production facilities–is clearly under threat,” Grieveson continues. A telling indicator: for the first time since the early 1990s, defence spending in the region accounts for a share of economic growth as large as, or even larger than, the previously dominant FDI.
For 2026, wiiw forecasts average growth of 2.3 per cent across the region’s EU member states, a downward revision of 0.3 percentage points compared with the winter forecast. Growth in 2027 is again expected to be 2.3 per cent% (down 0.4 percentage points). Even so, these countries are projected to grow at more than twice the rate of the euro area both this year (0.9 per cent, revised down 0.5 percentage points) and next (1.1 per cent, down 0.4 percentage points). “In the worst-case scenario of a protracted war in the Middle East, however, growth in some countries of the region could be around 1 to 1.5 percentage points lower,” warns Grieveson.
Poland again leads growth among the eastern EU members in 2026, at 3.6 per cent. In 2027, however, Estonia (2.8 per cent) is expected to edge ahead of Poland (2.6 per cent) following a lengthy slump. Hungary, in the throes of a change of government after 16 years of Viktor Orbán, is projected to grow by 1.6 per cent in 2026 and 1.8 per cent the following year. The six Western Balkan states will expand by an average of 2.5 per cent in 2026 and 3.1 per cent in 2027, while Turkey will manage 3.7 per cent and 4.1 per cent respectively.
The outlook for war-torn Ukraine, by contrast, is becoming increasingly bleak. The Vienna Institute forecasts growth of just one per cent for 2026, possibly rising to 2.5 per cent in 2027 if conditions allow. Aggressor Russia is in near-stagnation this year (0.9 per cent) and next (1.5 per cent), despite higher energy revenues from the war in Iran.
Hungary’s recovery after Orbán will take time
Following Péter Magyar’s resounding election victory with his Tisza Party over long-serving Prime Minister Viktor Orbán, the Hungarian economy is at a turning point. Sixteen years of Orbán’s rule have left the country lagging behind its neighbours Poland, Czechia and Slovakia. Recent years have been marked by economic stagnation, one of the highest inflation rates in the region, a large budget deficit, widespread corruption, frozen EU funds and an unbalanced industrial policy heavily focused on automotive and battery production.
“Péter Magyar, the new prime minister-designate, has presented an ambitious economic programme and wants to introduce the euro. However, given the high budget deficit, it will be a difficult task to create the necessary fiscal space for this. Hungary’s recovery will, in any case, take time,” notes Sándor Richter, wiiw’s Hungary expert. He forecasts growth of 1.6 per cent in 2026, rising to 1.8 per cent in 2027. Both figures represent downward revisions from the winter forecast (0.6 and 0.7 percentage points respectively), as the Iran war is already weighing on Hungary’s fragile recovery.
The outlook for Ukraine is gloomy
The Middle East war is hitting Ukraine hard. Russia’s massive air campaign against the country’s energy infrastructure caused widespread power cuts during the winter, and economic activity is still being severely hampered by the resulting shortages. Inflation is also rising, fuelled by steep increases in the prices of fuel and fertiliser following the outbreak of the Iran war.
For the year as a whole, wiiw still expects growth of one per cent, possibly rising to 2.5 per cent in 2027 (though that remains highly uncertain). Both figures are downward revisions from the winter forecast: 1.5 percentage points for 2026 and one percentage point for 2027. Beyond the enormous damage to production facilities caused by Russia’s war of aggression, the weak performance also reflects the impact of the Middle East war and Ukraine’s severe labour shortage.
“Ukraine’s heavy reliance on imports of fuel and fertilisers for its vital agricultural sector means that the war in Iran is hitting Ukraine particularly hard,” says Olga Pindyuk, wiiw’s Ukraine expert. ‘We are already seeing neighbouring countries restricting their fuel exports to Ukraine. Should this trend intensify, Ukraine could face serious difficulties.’ In the worst-case scenario of a protracted war in the Middle East and persistently high oil prices, the country could slip into recession.
Russia is suffering stagnation, despite windfall profits from the Iran war
For Moscow, by contrast, the closure of the Strait of Hormuz has brought unexpected revenue from higher oil and gas prices. The timing has suited the Kremlin, easing a strained budgetary situation. Last year’s deficit stood at 3.9 per cent of GDP, fairly high by Russian standards. Until the start of the war against Iran, it had looked as though the deficit might spiral out of control this year, prompting the government to consider 10 per cent across-the-board spending cuts, with the exception of military and social expenditure.
“The war with Iran is helping to stabilise the Russian budget. The longer it continues, and the longer oil prices remain high or rise further, the more positive the effects will be for Russia. After all, for every US dollar rise in the price of crude oil, 58 cents flow into the Russian state coffers,” says Vasily Astrov, wiiw’s Russia expert. The country’s economic output, however, is likely to benefit only marginally, as the additional revenue is being directed not into more spending but into reducing government borrowing and paying down the liabilities of energy companies.
For 2026, wiiw forecasts Russian GDP growth of just 0.9 per cent, expected to accelerate to 1.5 per cent in 2027. In the first two months of the year the economy actually contracted, by 2.1 per cent year on year in January and 1.5 per cent in February. “Russia’s weak growth is primarily attributable to the still-high key interest rate of currently 15 per cent, inadequate investment in new production capacity and labour shortages. The high energy prices resulting from the Iran war will do little to change that,” Astrov says.
In Russia’s best-case scenario (a protracted war in the Middle East with persistently high oil prices), economic growth could rise by a further 0.3 percentage points in 2026, to 1.2 per cent. ‘There is no doubt that the Iran war is helping President Putin to continue his war of aggression against Ukraine, as it furnishes him with additional revenue and greater political leeway,’ explains Astrov.
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