Region seen outpacing eurozone, but geopolitical risks and industrial weakness cloud outlook.

The economies of Central, Eastern and Southeast Europe are expected to remain resilient despite elevated energy prices and a difficult global backdrop, although structural weaknesses and geopolitical risks continue to weigh on the region, according to a new forecast from the Vienna Institute for International Economic Studies (wiiw).

The think-tank said the energy price spike triggered by the recent conflict in the Middle East has pushed inflation higher across the region, but has not caused the kind of inflationary surge seen after Russia’s full-scale invasion of Ukraine, according to a report released on July 1.

“Although energy prices – and consequently inflation – are likely to remain higher than before the war for the foreseeable future, there are no signs of an inflationary shock similar to that which followed the Russian invasion of Ukraine,” wiiw said in its summer forecast covering 23 countries in the region.

wiiw analysts warned, however, that the outlook remains highly dependent on geopolitical stability. “This, however, depends on the conflict with Iran not escalating again, the Strait of Hormuz remaining open and energy markets returning to normal,” said Richard Grieveson, wiiw deputy director and lead author of the report.

Alongside external risks, the region faces deeper structural challenges. Economies in Central and Eastern Europe are contending with weakening industrial competitiveness, stronger competition from China, and declining foreign direct investment.

Still, household spending continues to underpin economic activity. “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 said.

The inflow of European Union funding and increased defence spending have also supported activity, partially offsetting weakness in manufacturing.

“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 added.

wiiw forecasts average growth of 2.2% in 2026 for the eastern EU member states, slightly below its spring estimate. Growth is expected to accelerate modestly to 2.4% in 2027. That would leave the region substantially outperforming the eurozone, where growth is forecast at just 0.7% this year and 1.0% in 2027.

Meanwhile, performance across countries remains uneven. Romania stands out as the weakest performer, with its economy expected to shrink by 0.1% in 2026. The decline reflects tight fiscal consolidation aimed at reducing large budget deficits, alongside persistent political uncertainty. Slovakia is also expected to remain sluggish, with growth projected at just 0.5% in 2026 before improving to 1.6% the following year.

Hungary, by contrast, is forecast to recover from years of stagnation. wiiw expects the economy to expand by 1.7% in 2026 and 2.6% in 2027 following the victory of Péter Magyar and his Tisza party in the April general election.

Poland is once again expected to lead growth among eastern EU members, with expansion of 3.7% this year and 2.9% next year.

The six Western Balkan economies are projected to grow by 2.5% in 2026, rising to 3.0% in 2027, while Turkey is forecast to expand by 3.3% and 3.9%, respectively.

Ukraine remains under severe economic pressure as Russia’s war continues to damage infrastructure and disrupt production. wiiw maintained its forecast for Ukrainian growth at just 1.0% in 2026, with expansion rising to 2.5% in 2027.

Heavy Russian air strikes on Ukraine’s energy infrastructure caused widespread power outages and contributed to a 0.5% year-on-year contraction in the first quarter of 2026. The temporary closure of the Strait of Hormuz further compounded difficulties by raising fuel and fertiliser prices, both critical imports for Kyiv.

“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,” said Olga Pindyuk, wiiw’s Ukraine specialist.

She said long-term recovery depends heavily on an improvement in the security environment. “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 said.

A major stabilising factor has been the EU’s €90bn loan package approved in April. Of that amount, €30bn will support Ukraine’s state budget while €60bn will finance military spending. The budget allocation is expected to cover roughly two-thirds of Ukraine’s financing needs over 2026 and 2027.

Inflation in Ukraine is forecast to average around 10% this year before easing gradually from 2027 onward.

“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,” Pindyuk said.

Russia’s economy is also slowing sharply, according to wiiw. The institute cut its 2026 growth forecast for Russia to 0.6%, down 0.3 percentage points from its previous estimate. Growth is expected to improve only modestly to 1.3% in 2027.

Despite a temporary boost from higher energy export revenues during the Iran conflict, analysts said Russia remains trapped in prolonged 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,” said Vasily Astrov, wiiw’s Russia expert.

Investment activity fell by about 14% in the first quarter of 2026 as high borrowing costs and weak business confidence weighed on spending. Repeated internet shutdowns imposed by Russian authorities have also disrupted business operations in the country’s highly digitised economy.

At the same time, Ukrainian drone attacks on Russian energy infrastructure are increasingly affecting domestic supply chains. According to some estimates, up to one-third of Russia’s oil refining capacity has been damaged or disabled by drone strikes.

“In many places, there are fuel supply shortages. These will naturally have an adverse impact on economic activity in the country,” Astrov said.

“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 [Vladimir] Putin’s popularity,” he added. But despite mounting economic strain, Astrov said Russia retains the capacity to continue financing its military campaign.