Most of Central and Eastern Europe has shrugged off the Iran war’s energy shock, though Ukraine and Russia have not.
The energy price shock triggered by the Iran war, and plenty of geopolitical turmoil besides, has done less damage to the economies of Central, East and Southeast Europe than might have been feared. That is the main finding of the autumn forecast published this week by the Vienna Institute for International Economic Studies (wiiw), which covers 23 countries in the region. The picture is far from uniform, however, and varies sharply from country to country.
Romania and Slovakia are wrestling with large budget deficits and the weakness of the German car industry. Poland, Kazakhstan and the Western Balkans, by contrast, are booming. Almost five years into the war, neither Russia nor Ukraine is managing much growth at all.
Moving up the value chain
The eastern members of the European Union are meanwhile undergoing a fundamental change in their growth model. Their traditional role as low-cost manufacturing hubs for Western industrial firms is giving way to one driven by higher-value products and services, strong private consumption and public investment.
“Countries that invest in technology and productivity (for example, through automation and digitalisation) stand a good chance of continuing to prosper economically. Poland and, to some extent, Czechia are showing the way,” says Richard Grieveson, wiiw’s deputy director and the forecast’s lead author. He points to Poland’s high-tech industry, which has grown by around 40 per cent over the past decade.
The region is unlikely to profit as much from Germany’s sluggish recovery as it has in the past. Growth there is increasingly driven by defence and infrastructure spending, rather than by the carmaking and machinery industries into which central and eastern European economies are most deeply woven. “Investment in Central and Eastern Europe’s defence industry and the inflow of EU funds are, however, providing a significant boost to economic growth,” says Grieveson.
The EU’s tougher line in its trade dispute with China cuts both ways. Greater protectionism could give the region’s industries some breathing space, particularly carmakers, which are closely integrated with German industry and face fierce Chinese competition. But Chinese direct investment, and imports of intermediate goods from China, are likely to become harder and costlier to come by.
All told, wiiw expects the eastern EU members to grow by an average of 2.2 per cent in 2026, unchanged from its summer forecast, and by 2.5 per cent in 2027, a slight upward revision of 0.1 percentage points. That would be more than double the euro area’s expected rate in both years (0.9 per cent and 1 per cent respectively), allowing the region to keep catching up.
Romania is the notable exception. Strict fiscal austerity will tip it into a mild recession this year, with output shrinking by 0.4 per cent. Poland once again leads the eastern EU members, with growth of 3.7 per cent this year and 3 per cent next.
Hungary, where voters ended Viktor Orbán’s long and authoritarian rule in the spring, is enjoying an economic revival and should grow by 1.7 per cent this year and 2.6 per cent in 2027. Investors have shown striking confidence in Péter Magyar’s new government, reflected in a sharp appreciation of the forint and a steep fall in yields on Hungarian government bonds.
The six Western Balkan economies are set to grow by an average of 3.2 per cent in 2026 and 3.3 per cent in 2027. Serbia, which goes to the polls on October 25 (when Aleksandar Vučić, its former president, will seek to become prime minister), is forecast to grow by 3.3 per cent this year and 3.4 per cent next. Turkey is also doing comparatively well, with growth projected at 2.9 per cent in 2026 and 3.5 per cent in 2027, although wiiw has trimmed both figures by 0.4 percentage points.
Backs to the wall
Ukraine’s position is becoming increasingly critical. “Russia’s relentless air strikes and the resulting destruction of energy facilities, critical infrastructure and port facilities on the Black Sea, coupled with the blockade of its ports, are taking an ever-heavier toll on the economy,” says Olga Pindyuk, wiiw’s Ukraine expert.
The institute has therefore cut its 2026 growth forecast for Ukraine to just 0.6 per cent, 0.4 percentage points below its summer estimate. It still expects growth of 2.1 per cent in 2027 (also 0.4 points lower than before), but only if Ukraine continues to receive adequate financial and military support from abroad, which looks increasingly uncertain.
“The fifth winter of the war is likely to put Ukraine to a severe test. With its dwindling supplies of air defence missiles, the country is finding it increasingly difficult to defend itself against Russia’s growing barrage of ballistic missiles and drones. Faced with only limited military gains on the battlefield, Putin is now increasingly focusing on terrorising Ukraine’s civilian population,” says Pindyuk.
The destruction of export infrastructure is hitting Ukraine’s vital farm sector especially hard. In August grain exports plunged by 70 per cent compared with July. Steel is also under severe pressure, with some plants forced to halt production temporarily. Inflation remains high, at around 10 per cent, prompting the National Bank of Ukraine to raise its key interest rate to 16 per cent. That has pushed up borrowing costs for firms and households, putting a further brake on growth.
The damage is also straining already precarious public finances, as tax revenues fall and spending rises. According to Ukraine’s finance ministry, the country still faces a funding gap of around 33 billion US dollars for 2027.
Running on empty
Russia, the aggressor, is increasingly feeling the economic consequences of its invasion too. The institute forecasts meagre growth of 0.6 per cent in 2026 and a modest recovery to 1.3 per cent in 2027, both unchanged from the summer.
Ukrainian drone strikes on refineries have triggered a severe fuel crisis across Russia. The Central Bank of Russia estimates that the resulting shortages could add 1.5 percentage points to inflation by the end of the year, and has put further rate cuts on hold, leaving its key rate at 14 per cent.
“The pause in monetary easing is inevitably hampering Russia’s economic recovery, as high interest rates weigh heavily on economic activity. Ukrainian drone strikes are therefore having a very tangible adverse impact on Russian growth,” says Vasily Astrov, wiiw’s Russia expert.
The shortages have also forced the government to ban exports of petrol, diesel and jet fuel, stopping Russian exporters from fully cashing in on the surge in global fossil-fuel prices caused by the Iran war. “It therefore remains to be seen how much diesel Russia can actually supply to the world market under the deal between US President Trump and President Putin,” says Astrov.
Western sanctions are taking their toll as well, restricting access to high-quality capital goods such as machinery and undermining long-term growth potential. Fixed investment fell by around 10 per cent in the first half of the year. “Weak investment in new production capacity is one of the biggest problems facing the Russian economy,” says Astrov. Despite persistent labour shortages in many sectors, the slowdown is now showing up in a slight rise in unemployment, something not seen for some time.
The cost of the war is also weighing on the public finances, with the budget deficit expected to exceed three per cent of GDP in 2026. For 2027 the government plans tax increases and spending cuts, though defence spending and social benefits will be spared. “President Putin will have little difficulty in financing the war against Ukraine next year either. Russia’s public debt remains very low by international standards, and the government can continue to borrow from domestic banks,” says Astrov.
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