The economic fallout from the conflict in the Middle East is expected to slow growth across emerging Europe, Central Asia and parts of Africa and the Mediterranean, as higher energy costs reignite inflation, weaken industrial competitiveness and strain already fragile public finances, the European Bank for Reconstruction and Development (EBRD) said on June 3.

In its latest Regional Economic Prospects report, the EBRD cut its growth forecasts for 2026 across the economies where it operates, warning that a new energy shock has compounded existing structural weaknesses in manufacturing and exposed vulnerabilities created by high levels of public debt.

The bank now expects aggregate growth across its regions to slow from 3.4% in 2025 to 3.1% in 2026, before recovering to 3.6% in 2027. The 2026 forecast is 0.5 percentage point lower than projected in February, while the 2027 forecast has been revised down by 0.1 percentage point.

The report, titled "Strai(gh)t Talk", identifies the escalation of conflict in the Middle East as the principal shock affecting the outlook. Rising oil and gas prices, disruption to shipping through the Strait of Hormuz and widening energy-cost differentials between Europe and the United States have combined to weaken economic momentum.

"The conflict in the Middle East has delivered a new shock to regions already navigating weakness in manufacturing industries and fragile fiscal positions," Beata Javorcik, the EBRD's chief economist, said in a statement.

"Higher energy costs are squeezing competitiveness, reigniting inflation and tightening fiscal space at a time when many economies can least afford it."

The latest shock comes as European industry is still grappling with the consequences of previous energy crises. According to Javorcik, the cumulative effect is becoming increasingly visible in industrial production data.

"As a result of two major energy shocks occurring in quick succession, we are witnessing a rapid decline in the output of energy-intensive industries," she told IntelliNews in an interview.

"Much of the discussion has focused on Germany, but our findings show that this trend extends across other advanced European economies, including Portugal and Italy, and is particularly pronounced in Eastern Europe, notably in Hungary, Czechia, Poland, and Romania."

The findings highlight a growing divergence between energy-intensive industries and the wider economy.

"While output in non-energy-intensive industries has remained broadly stable in many countries, energy-intensive sectors have experienced a marked contraction, highlighting a deeper structural issue facing Europe alongside the broader competitiveness challenge," Javorcik said.

European gas prices now exceed US prices by more than five times, according to the report, while electricity prices also remain substantially higher. The disparity is accelerating longer-term shifts in industrial production toward less energy-intensive sectors and raising concerns about Europe's ability to compete globally in key manufacturing industries.

"Yet another challenge concerns access to critical raw materials," Javorcik said. "None of these three challenges can be resolved quickly."

The deterioration in the outlook comes despite signs that global trade patterns have begun adapting to rising geopolitical tensions. Following sharp increases in US tariffs in 2025, imports from China into the United States declined while imports from Southeast Asian nations increased. By contrast, changes in US imports from EBRD economies were relatively modest.

The EBRD said exports associated with AI supply chains have been growing faster than other exports across its regions, helping offset some of the weakness in traditional manufacturing sectors.

"One bright spot is that the AI boom in the United States is generating strong demand for goods linked to AI-related activities, including processors, optical equipment, communications technology, and computer hardware," Javorcik said. "As a result, Central European countries such as Hungary and Poland are experiencing a surge in exports."

Nevertheless, the broader economic environment has become increasingly challenging. Growth across EBRD economies slowed to an estimated 2.9% year-on-year in the first quarter of 2026.

The energy shock has also complicated the inflation outlook. After moderating through much of late 2025, inflation accelerated again in early 2026. Average inflation across EBRD economies rose by 1.2 percentage points between February and April, reaching 6.4%, driven primarily by higher energy and food prices. Currency depreciation against the US dollar has added further inflationary pressure in several economies.

"We are closely monitoring inflation," Javorcik said. "Energy prices continue to be a major source of inflationary pressure, while rising food prices may become an additional concern later this year."

She warned that higher fertiliser costs could create a second-round inflationary shock through agricultural markets.

"Higher fertiliser costs could reduce agricultural output, driving up domestic food prices and potentially prompting countries to impose export restrictions," she told IntelliNews.

"These shocks matter more for emerging markets, where energy and food account for a larger share of household consumption expenditures."

Nearly two-thirds of EBRD economies have responded to higher energy costs by introducing support measures, including fuel-price caps, energy tax reductions and targeted subsidies for households and businesses.

The inflation resurgence is occurring at a difficult time for governments already facing mounting fiscal pressures.

"Many countries are heavily indebted, with debt-servicing costs consuming a substantial share of government revenue," Javorcik said.

The report warns that tighter global financial conditions and higher borrowing costs are creating additional challenges, particularly in the southern and eastern Mediterranean region and sub-Saharan Africa, where debt burdens were already elevated before the latest crisis.

The EBRD said the fiscal outlook had deteriorated significantly since its previous forecast, with governments increasingly constrained in their ability to cushion households and businesses from rising prices.

Across Central Europe and the Baltic states, growth is expected to accelerate slightly from 2.6% in 2025 to 2.8% in 2026 before moderating to 2.5% in 2027. However, the outlook has been revised down because of higher energy prices.

Poland, one of the region's strongest performers, is expected to grow by 3.5% in 2026 after expanding by 3.6% in 2025. Growth is being supported by strong domestic demand, EU-funded investment and increased defence spending, which is projected to reach 4.8% of GDP.

The Baltic states are also expected to continue expanding despite weaker external demand. The EBRD forecasts growth of 2.1% in Estonia, 2.0% in Latvia and 3.0% in Lithuania in 2026, supported by resilient consumption, defence spending and infrastructure projects including Rail Baltica.

In south-eastern EU member states, however, growth is forecast to slow sharply. The region's expansion is expected to decelerate from 1.2% in 2025 to just 0.5% in 2026, largely because of fiscal consolidation and political uncertainty in Romania.

The Western Balkans are projected to perform somewhat better, with growth rising from 2.6% in 2025 to 2.9% in 2026 and 3.5% in 2027 as major infrastructure projects gain momentum.

Central Asia is expected to remain the fastest-growing EBRD region despite some moderation. Growth is forecast at 5.6% in 2026 and 5.3% in 2027, down from 6.9% in 2025.

The economies of Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan, Turkmenistan and Uzbekistan have shown resilience despite geopolitical tensions, supported by domestic consumption, investment and expanding services sectors. However, the bank warned that growth prospects are becoming increasingly dependent on domestic reforms and efforts to strengthen resilience against external shocks.

In Eastern Europe and the Caucasus, growth is expected to remain broadly stable at 2.8% in 2026 before accelerating to 3.9% in 2027.

Ukraine's growth forecast for 2026 was revised down to 2.2%, reflecting continued disruption caused by Russia's invasion, higher energy-import costs and rising inflation. The EBRD said macroeconomic stability had nevertheless been maintained through substantial external financial support.

Turkey's economy is expected to grow by 3.5% in 2026 and 4.0% in 2027, with forecasts lowered because of higher energy-import costs, persistent inflation and potential disruptions to tourism and manufacturing supply chains.

The sharpest downgrades were recorded in the southern and eastern Mediterranean region, where growth is expected to slow from 3.1% in 2025 to 2.5% in 2026. Lebanon and Iraq, which are most directly affected by the conflict, saw the largest downward revisions.

Sub-Saharan Africa is forecast to slow from 5.2% growth in 2025 to 4.7% in 2026 as trade disruptions, higher energy-import costs and weak investment weigh on activity.