EBRD slashes 2026 growth forecast for developing economies to 3.1% due to Iran war fallout

The European Bank for Reconstruction and Development on Wednesday cut its 2026 growth forecast for its 41 member economies to 3.1%, down 0.5 percentage points from its February projection, citing soaring energy costs and supply chain disruptions from the Middle East war.

"This report is a story of the continued energy shock," EBRD Chief Economist Beata Javorcik told Reuters. "It hit at the moment that was challenging for Europe, a moment where the sentiment in European manufacturing has been weak."

The biggest downward revisions from February hit Lebanon and Iraq. Lebanon's growth forecast was slashed by 6 percentage points, with the economy now expected to contract by 2% in 2026. Iraq's forecast was cut by 5.1 percentage points, with a projected contraction of 1.5%.

For Türkiye, the bank cut its 2026 growth forecast to 3.5% from 4%, and its 2027 forecast to 4% from 4.5%, citing rising energy imports, persistent inflationary pressures and spillover risks from the Iran war on tourism and manufacturing supply chains. "Disinflation is costly and acts as a brake on the economy, but the cost of not addressing inflation would be much higher," Javorcik said.

Inflation across EBRD economies rose by 1.2 percentage points between February and April to an average of 6.4%. The bank warned that further food price increases — should higher fertilizer costs hit yields — would be felt most in lower-income EBRD economies, and that higher borrowing costs mean inflation spikes are no longer reducing debt-to-GDP ratios as they did after COVID-19.

The EBRD in April announced it was unlocking 5 billion euros ($5.8 billion) to help shore up economies hit by the Middle East war.

Energy price spikes this year have stayed below the surge after Russia's 2022 invasion of Ukraine, but European gas prices remain around five times U.S. levels. The report says this is already shifting exports away from energy-intensive sectors, while AI-related exports from EBRD regions are growing faster — rising 42% year-over-year in Hungary and 21% in Poland in 2025.

"This is a bright spot... the region already has comparative advantage in some of those industries," Javorcik said, adding the AI boom could help cushion a structural adjustment from the energy shock.

Almost two-thirds of EBRD economies, and around a quarter of economies globally, have implemented at least one measure to conserve energy or support consumers in response to higher prices. Javorcik warned that removing or lowering taxes on fuel "destroys the incentive for people to buy less and that may exacerbate sort of shortages going forward."

Last year, EBRD region economies grew at a quicker-than-expected rate of 3.4% as they adapted to tariff and trade turmoil.