World Bank Warns of Slowing Growth in Europe and Central Asia, Urges Innovation and Reform

Slowing Economic Momentum in Europe and Central Asia: World Bank Urges Action to Spur Innovation and Private Sector Growth.

The World Bank’s latest Economic Update for Europe and Central Asia, released today, signals a significant deceleration in economic momentum across the region. After posting a more stable growth rate of 3.6% in 2024, regional economic expansion is now projected to slow to 2.5% in 2025–26. The slowdown is attributed primarily to weakening external demand, a cooling Russian economy, and broader global uncertainty.

2024: A Year of Stabilization Fueled by Consumption

Despite a challenging global environment, the Europe and Central Asia (ECA) region experienced a rebound in 2024, growing at 3.6%. This stabilization was driven largely by resilient private consumption. Factors such as higher real wages, increased remittance inflows, and consumer borrowing helped offset the drag from low growth in the European Union, which remains a major trade partner for the region.

However, inflationary pressures surged during this period. Food and services price hikes pushed inflation to 5% year-on-year by February 2025, up from 3.6% in mid-2024. As a response, central banks across the region were compelled to either increase policy rates or halt previously planned monetary easing cycles.

Outlook for 2025–26: Growth Disparities Across Sub-Regions

The regional slowdown masks considerable variation across sub-regions:

• Central Asia is projected to remain the fastest-growing area despite a slight slowdown, with growth easing to 4.7% due to reduced oil sector expansion in Kazakhstan, lower exports, and normalized remittance inflows.

• South Caucasus economies are expected to average 3.5% growth, with prior gains from trade and capital inflows starting to taper off.

• Western Balkans are forecast to moderate to 3.4% growth, hindered by trade policy uncertainties and indirect shocks from EU supply chains.

• Central Europe could see a modest improvement to 2.7%, yet remain below historical averages.

• Russia’s economy is predicted to slow significantly, growing only 1.3%, weighed down by sanctions and limited investment.

• Türkiye may experience a moderate uptick to 3.3% growth, still underperforming relative to its long-term trend due to external headwinds and internal economic adjustments.

• Ukraine, amidst reconstruction and persistent conflict, is expected to grow at just 2% in 2025.

A Call for Bold Reforms: Private Sector and Innovation in the Spotlight

The World Bank emphasizes that current growth levels are unsustainable in the long term without structural transformation. Highlighting the need for domestic reforms, the report focuses on reinvigorating the private sector, fostering entrepreneurship, and promoting technology adoption.

“Global uncertainty, geoeconomic fragmentation, and weak expansion among key trading partners are making it more challenging to sustain this growth,” said Antonella Bassani, World Bank Vice President for Europe and Central Asia. “To achieve stronger economic expansion, countries must accelerate domestic reforms that foster a dynamic and innovative private sector.”

A key message of the report is the necessity of focusing growth strategies on young, high-potential companies rather than the broad SME sector. These dynamic firms, often at the cutting edge of innovation, have shown the greatest capacity to generate jobs and productivity gains.

Innovation as a Catalyst for Long-Term Prosperity

The report warns that most middle-income countries in the region risk stagnation unless they break out of the current low-productivity trap. According to Ivailo Izvorski, World Bank Chief Economist for the region, “Innovation and experimentation in business are essential for boosting productivity and a prerequisite for achieving and sustaining high-income status.”

Countries aiming to join the ranks of high-income economies must support firm growth through a conducive policy environment. This includes:

• Improving access to long-term finance: The region suffers from underdeveloped venture capital and equity markets. Risk capital must be scaled up to enable firm innovation and resilience.

• Encouraging technology adoption: Currently, many local firms serve as offshore production units for foreign entities rather than developing proprietary innovations. Targeted R&D incentives and better competition frameworks are needed.

• Breaking market dominance of state-owned enterprises (SOEs): These often crowd out private sector innovation, reducing overall dynamism in the economy.

Building Human Capital for the Innovation Economy

The World Bank underscores the importance of investing in people. Strengthening education and training systems, fostering entrepreneurial mindsets, and creating upskilling opportunities are seen as essential for enabling workers to participate in and contribute to more advanced economies.

Attracting and retaining talent will require not just investments in education, but also in creating environments where skilled professionals and entrepreneurs can thrive and innovate. For countries in the ECA region, this could be the turning point toward a more prosperous, inclusive, and resilient economic future.