EBRD slashes growth forecast again on tariffs, uncertainty

Qatar Tribune

13-05-2025

Agencies
Tariffs, conflicts and economic concerns in major economies like Germany and China have prompted the European Bank for Reconstruction and Development (EBRD) to lower its economic growth forecasts for the fourth consecutive time, the lender announced on Tuesday.
In its latest report, which covers economies in emerging Europe, central Asia, the Middle East and Africa, the EBRD lowered its previous forecast for 2025 made in February by 0.2 percentage points to 3%, with downward revisions across most economies.
'The revision is a result of increased global policy uncertainty, weaker external demand and the direct and indirect effects of announced increases in import tariffs,' the London-based bank said. It sees a modest recovery to 3.4% in 2026.
'Almost no country remains untouched by what's happening in the world,' EBRD Chief Economist Beata Javorcik said. 'The biggest effect on our countries is indirect via changes in prospects for Germany and China.' Slovakia and Hungary will suffer the largest direct hit from U.S. tariff increases, with 2025 growth forecasts revised down by 0.5 percentage points, to 1.4% and 1.5%, respectively. Both countries are heavily geared toward the automotive industry.
The report was compiled before the latest news on the U.S. and China reaching a deal to temporarily slash tariffs.
'Firms are halting investments and waiting to see what will happen,' Javorcik said. 'We have this very big shift of mindset from resilience of global value chains in terms of security of supply ... now, security of market access is the key concern.' The United States in April imposed a 10% 'baseline' tariff on nearly all its trading partners, along with sector-specific levies of 25% on cars, steel and aluminium.
These are expected to have 'significant global repercussions, including for the EBRD regions,' the bank said.
The analysis indicates that the average effective U.S. tariff on imports from the bank's regions is estimated to surge from 1.8% in 2024 to 10.5%, assuming unchanged composition of exports, it added.
Projects underway are already being slowed down and delayed, even as the U.S. paused blanket new 'reciprocal' tariffs and said it was ready to negotiate on other levies it imposed as part of U.S. President Donald Trump's aim to convince firms to bring manufacturing back to the United States.
But the economic hits to Germany, China and other large European countries are looming; Germany is the largest trading partner for 10 EBRD economies, with exports to it accounting for nearly a quarter of gross domestic product (GDP) in the Czechia, and close to 20% in Slovakia, Hungary and North Macedonia.
While Germany saw a slight rebound in growth at the start of 2025 after two years of recession, the outlook for Europe's largest economy has been clouded by U.S. tariffs.
That adds to problems already felt in its manufacturing sector and as its economy is expected to stagnate this year.
While Europe's push to boost defense spending could be a boon for certain countries, including Poland, Türkiye and the Czechia, 'there is a very real concern that the increase in defense spending will crowd out other expenditure.' Meanwhile, while the International Monetary Fund (IMF) expects average debt in EBRD regions to remain broadly stable at 52% of GDP from 2025-2029, Javorcik said that was 'too optimistic given what we are seeing on the ground.' The IMF, Javorcik said, is assuming revenues will be high and that new spending will be matched by cuts elsewhere.
'We think that actually some budget deficits will be higher,' she said.
Javorcik said the debt and reliance of many countries on international bond borrowing add an element of risk; already, Egypt is spending 13% of its GDP servicing debt.
'If there is a flight to safety, if investors choose to go to safer havens, that means our countries might be exposed to that shock,' she said.
For Ukraine, the EBRD revised its forecast for this year downward by 0.2 percentage points to 3.3%, due to weaker European Union demand and continued damage to energy infrastructure from Russian attacks.
In Türkiye, the bank said it expects the economy to grow by 2.8% in 2025, 0.5 percentage points lower than its February 2025 forecast due to lower domestic and external demand and tighter-than-expected monetary policy.
It expects the Turkish economy to then grow by 3.5% in 2026, unchanged from previous forecasts.
Türkiye's downward revision reflects expectations of tighter domestic financial conditions as heightened uncertainty weighs on domestic demand, as well as weakening external demand due to increased uncertainty around global trade policy, the bank said.
'Downside risks stem from still-high inflation and the impact of tighter-for-longer global financial conditions on Türkiye's substantial short-term external financing needs,' it noted.
The report noted recent improvements in the economy's external position, with net exports rising and the current account deficit declining steadily in the 12 months to February this year. However, inflows of foreign direct investment (FDI) remained relatively low at $12.2 billion, it added.
The EBRD invested a record 2.6 billion euros ($2.89 billion) in Türkiye in 2024, driven by the private sector's appetite for green investments and the bank's continuing support for regions affected by the devastating February 2023 earthquakes.
The bank's cumulative investment in the country stands at over 22 billion euros, with its current portfolio in the country totalling around 8 billion euros.
The EBRD was founded in 1991 to help former Soviet bloc nations embrace free-market economies, but has since extended its reach to the Middle East and North Africa.