EBRD cuts growth forecast amid rising uncertainty in trade policy

ISTANBUL

The European Bank for Reconstruction and Development (EBRD) on Tuesday lowered its regional economic forecast for 2025 by 0.2 percentage points due to heightened trade policy uncertainty.

The EBRD reduced its forecast to 3% for 2025 due to tariff hikes and global policy uncertainty, which have dampened trade and stressed supply chains, according to the bank's Regional Economic Prospects report.

"This downward revision follows a similar 0.3 percentage point cut in February and reflects a confluence of global headwinds, as captured in the title of the new report, 'Uncertain times,'" the report said.

These headwinds include a sharp rise in trade and economic policy uncertainty, weaker external demand, and the direct and indirect effects of newly announced tariff increases.

“Although understanding the full macroeconomic effects of the newly announced tariffs will take time, it is already clear that our regions have entered a period of heightened uncertainty and slower growth,” said Beata Javorcik, the EBRD’s Chief Economist.

“Reducing trade tensions through constructive dialogue and achieving consensus on trade policy among key stakeholders are crucial, as prolonged uncertainty carries painful economic costs," she added.

However, the bank kept its 2026 growth forecast at 3.4%.
Among the EBRD economies, Slovakia is expected to take the largest direct gross domestic product (GDP) hit from US tariff increases (0.8%), followed by Jordan (0.6%) and Hungary (0.4%).

Inflation in the EBRD regions showed a concerning reversal. After peaking at 17.5% in late 2022 and falling to 5.3% in September 2024, average inflation accelerated again to 6.1% as of February 2025.

"Inflationary pressures are now predominantly demand-driven, reflecting loose fiscal policies and strong nominal wage growth," the report noted.

The report also stated that many EBRD economies have increased their defense spending due to rising geopolitical concerns. Defense spending in all of the bank's regions nearly doubled between 2014 and 2023, rising from 1.8% of GDP to over 3.5%.

Arms exports from the region increased from 0.05% of GDP in 2019 to 0.09% in 2024, with Slovakia, Czechia, Poland, and Bosnia and Herzegovina now accounting for the largest export volumes.

The report also highlighted how domestic sourcing and more defense spending might boost output. The GDP of Slovakia, Greece, Croatia, and Hungary could increase by 1.0 to 1.5% due to rising demand for defense products.

Türkiye's growth forecast was cut by 0.2 percentage points to 2.8% for 2025. "The 2025 forecast was cut due to tighter-than-expected monetary policy and lower domestic and external demand," the report said.