Central European economies are confronting a deteriorating economic outlook, with several nations experiencing a significant slowdown driven by escalating trade tariffs and intensified competition from China. The European Bank for Reconstruction and Development (EBRD) projects a moderation in growth across its investment regions, attributing this trend to persistent global trade tensions and a weakening international demand. While overall growth for the EBRD’s 43 investment countries is anticipated to reach 3.3% in the first half of 2025, a noticeable deceleration is expected in the latter half of the year.
The impact of these global headwinds is particularly pronounced in Central Europe and the Baltic states. Slovenia’s growth forecast has been substantially revised downward, with its economy now expected to expand by a mere 0.7% this year, following a sharp decline in exports to the United States. Hungary’s economic prospects have also been downgraded, with projected growth of 0.5%, exacerbated by lagging investments—partially due to frozen European Union funds—and increased financing costs. Furthermore, weakness emanating from Germany’s manufacturing sector has contributed to Hungary’s slowdown. Latvia and Estonia have also experienced downward revisions to their growth forecasts. The region of Central Europe and the Baltic states collectively anticipates growth of 2.4% in 2025, with an upward revision to 2.7% in 2026.
These nations face limited growth potential due to subdued external demand, budgetary constraints, and the impact of higher U.S. tariffs on their trade activities. However, the EBRD report suggests that increased infrastructure investment could partially mitigate these challenges. In contrast, Poland’s economic outlook has seen an upward revision, with an expected growth of 2.5% this year, bolstered by significant infrastructure investments, including projects related to the energy transition, railways, and defense. Lithuania’s forecast for 2026 has also been adjusted positively. EBRD Chief Economist Beata Javorcik highlighted that diversified and larger economies, such as Poland, which are less export-dependent and have prioritized public investment, tend to perform better.
Beyond Central Europe, other regions are also grappling with economic pressures. Ukraine’s growth outlook has been reduced to 2.5% due to the ongoing conflict and adverse harvest conditions. In South-Eastern Europe, encompassing countries like Bulgaria, Greece, and Romania, growth forecasts have been lowered, with lower export volumes partially offset by stronger investment. Romania, in particular, is identified as being in a weaker position, necessitating the full utilization of EU funds to stimulate growth. The EBRD projects an average GDP growth of 1.7% for this sub-region in 2025.
The primary risks confronting EBRD countries in Europe remain significant. Escalating trade tensions, particularly the 15% tariff on nearly all EU exports to the U.S. enacted in late August 2025, are expected to negatively impact output in the long term, despite a potential short-term export frontloading effect. Beyond U.S. trade policy, European nations face the persistent challenge of intense trade competition from China, which now accounts for a substantial portion of global exports and exports similar products to those of many European countries. This competition is increasingly evident in sectors like automobiles and batteries.
Fiscal vulnerabilities also pose a risk, with several economies bearing the burden of high debt servicing costs. For instance, Hungary’s debt servicing costs are estimated at around 4% of GDP, while Poland and Romania face costs exceeding 2% in 2025.
Opportunities Amidst Challenges
While U.S. trade policy presents a threat, it also creates potential opportunities for Eastern European countries. The increased tariffs on Chinese goods may allow these nations to capture market share for products that were previously less competitive. Furthermore, the EBRD report suggests that Chinese foreign direct investment (FDI) in sectors like car manufacturing, coupled with technology transfer initiatives, could benefit European companies.
The concept of increased defense spending as a catalyst for GDP growth is also under examination. According to Javorcik, the effectiveness of such spending hinges on its allocation. Prioritizing infrastructure, energy security, and IT security, rather than solely core defense capabilities, can stimulate the private sector and foster economic growth. Moreover, decisions regarding the balance between domestic procurement and imports, and substantial investment in research and development (R&D) for future defense systems, are crucial determinants of long-term economic stimulus.
Lucas turns raw market data into actionable strategies, spotting trends in a heartbeat. With 9 years managing portfolios, he treats market volatility like a surfer riding big waves—balance and timing are everything. On weekends, Lucas hosts “Bull & Bear Banter” podcasts, showing that finance discussions can be as entertaining as they are informative.