The Iran war has left Central Europe’s growth largely intact, but inflation is sticking, Ukraine is battered and Russia is in crisis.
The energy price shock from the war in the Middle East, which now appears to be over, has pushed up inflation, and the wider international picture remains difficult. Even so, growth across Central, East and Southeast Europe is holding up well, as it is in most of the eastern EU member states. Energy prices, and with them inflation, are likely to stay higher than before the war for some time yet, but there is no sign of an inflationary shock on the scale of the one that followed Russia’s invasion of Ukraine. Those are the headline findings of the latest summer forecast from the Vienna Institute for International Economic Studies (wiiw), covering 23 countries in the region.
“This, however, depends on the conflict with Iran not escalating again, the Strait of Hormuz remaining open and energy markets returning to normal,” says Richard Grieveson, deputy director of wiiw and lead author of the summer forecast. Beyond these geopolitical risks, the countries of Central Eastern Europe (CEE) are wrestling with structural problems too: a loss of industrial competitiveness, sharper competition from China and falling foreign direct investment.
“Growth in Central Eastern Europe is primarily driven by private consumption, which has developed very positively thanks to strong real wage increases in recent years, even though the momentum is now slowing,” Grieveson explains. Inflows of EU funds and spending on the defence industry are helping as well. “However, CEE’s industrial sector, which is closely integrated with Germany, continues to struggle as a result of the crisis in German manufacturing and its domestic challenges,” he says.
For 2026 wiiw forecasts average growth of 2.2 per cent for the eastern EU member states, a modest downward revision of 0.1 percentage points on the spring forecast. Growth in 2027 should edge up to 2.4 per cent, 0.1 percentage points higher than previously expected. The region’s EU members are on course to grow around three times faster than the euro area (0.7 per cent) this year and, at 2.4 per cent, at least twice as fast in 2027 (one per cent).
Romania is the clear laggard, with its economy expected to shrink slightly this year, by about 0.1%. That reflects the government’s tough fiscal consolidation, brought in to tackle the large budget deficits run up in earlier years, along with continuing political uncertainty. Slovakia is likewise set for growth of just 0.5 per cent in 2026 before recovering to 1.6 per cent in 2027. Hungary, by contrast, looks set to grow by 1.7 per cent this year, following Péter Magyar and his Tisza party’s win in the spring parliamentary elections, and by 2.6 per cent in 2027, finally leaving behind the stagnation of the late Orbán years. Poland remains the pace-setter among the eastern EU members, at 3.7 per cent this year and 2.9 per cent next.
The six Western Balkan economies are projected to grow by an average of 2.5 per cent in 2026, rising to three per cent in 2027. Türkiye is expected to expand by 3.3 per cent in 2026 and 3.9 per cent in 2027.
Ukraine has been hit by Russian air strikes and the Iran war
Ukraine’s position is far more precarious. As it forecast in spring, wiiw still expects the economy to grow by just 1% across 2026, with the pace picking up to 2.5 per cent in 2027.
Heavy Russian air strikes on the country’s energy infrastructure, and the power cuts that followed, saw output contract by 0.5 per cent year on year in the first quarter of 2026. The blockade of the Strait of Hormuz has added to the strain by raising prices for fuel and fertilisers, both of which Kyiv relies heavily on importing.
“A stronger performance by the agricultural sector, higher exports, and public investment on reconstruction and the defence industry could still salvage this year, to some extent,” says Olga Pindyuk, wiiw’s Ukraine expert. “Over the coming years, however, growth will only be able to accelerate if the war with Russia is de-escalated and ultimately brought to an end on terms favourable to Ukraine,” she adds.
One steadying factor is the 90 billion euros EU loan approved in April. Of this, 30 billion euros will go straight into Ukraine’s state budget and the remaining 60 billion euros will fund military spending. The budget portion will cover roughly two thirds of Ukraine’s financing needs in 2026 and 2027.
Inflation is likely to stay high, averaging around 10 per cent this year, before easing from 2027 and settling near six per cent in 2028. “The situation could get harder for Ukraine if the Iran war were to escalate again and push energy prices sharply higher. In that case, the economic damage would be considerably greater,” says Pindyuk.
Russia’s economy is in crisis
Russia, the aggressor, is in serious economic trouble of its own. For 2026 wiiw forecasts growth of just 0.6 per cent, a downgrade of 0.3 percentage points on the spring figure. Growth should recover to 1.3 per cent in 2027, though that too has been trimmed, by 0.2 percentage points. Despite a temporary lift in energy export revenue from the Iran conflict, Russia remains stuck in deep stagnation.
“The main reason is the central bank’s still excessively restrictive monetary policy, which is choking economic activity by making borrowing prohibitively expensive, particularly for the purchase of consumer durables and for investment,” says Vasily Astrov, wiiw’s Russia expert. Investment duly fell by about 14 per cent in the first quarter of 2026, dragged down as well by the gloomy outlook and by the exhaustion of scope for import substitution.
More recently, the Russian authorities have repeatedly ordered internet shutdowns, ostensibly on security grounds, adding a further drag on a heavily digitalised economy. Yet large-scale Ukrainian drone attacks on Russia’s energy infrastructure are likely to do even more damage. Kyiv seems to be gaining the upper hand in the drone war, striking ever deeper inside Russia. By some estimates as much as a third of the country’s oil-refining capacity has already been knocked out.
“In many places, there are fuel supply shortages. These will naturally have an adverse impact on economic activity in the country. Alongside the internet outages, war fatigue and the economic slowdown, these fuel shortages have been among the reasons for the recent marked decline in President Putin’s popularity,” says Astrov. “Nevertheless, Russia will continue to be able to wage and finance its war of aggression against Ukraine,” he goes on.
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