Growth across Central, Eastern and Southeast Europe is proving more resilient than expected despite the shock from the Iran war, but risks are mounting as higher energy prices, weaker trade and geopolitical uncertainty weigh on the outlook, according to a new forecast by the Vienna Institute for International Economic Studies.

In its spring outlook covering 23 economies, the Vienna-based institute said most countries in the region are still expanding, even as momentum slows and vulnerabilities deepen.

For the 27 countries covered in the report wiiw projects growth of 2.1% this year, rising to 2.5% in 2027 and 2.9% in 2028. However, there are broad variations, with higher growth expected in the Western Balkans, Turkey and Kazakhstan, and considerably lower in the war-afflicted economies of Russia, Ukraine and Belarus. 

“For the time being, the impact of the Iran war on EU member states in Eastern Europe remains manageable. However, rising inflation, lower export demand, disrupted supply chains and a further decline in direct investment could have a severe impact,” said Richard Grieveson, the report’s lead author.

The institute forecasts average growth of 2.3% for EU member states in the region in 2026, a downward revision of 0.3 percentage points compared with its winter outlook. Growth is expected to remain at 2.3% in 2027, also revised lower.

Even so, the region is still set to outperform the euro zone, where growth is forecast at just 0.9% in 2026 and 1.1% in 2027.

“In the worst-case scenario of a protracted war in the Middle East, however, growth in some countries of the region could be around 1 to 1.5 percentage points lower,” Grieveson warned.

Among EU economies in the region, Poland is expected to lead growth in 2026 at 3.6%, while Estonia is forecast to edge ahead in 2027 with 2.8%, slightly above Poland’s projected 2.6%. Croatia is set to be another strong performer, with 2.6% growth in 2026, rising slightly over the following two years. 

Hungary, meanwhile, faces a more subdued recovery as it emerges from more than a decade of rule by Viktor Orbán. The election victory of Péter Magyar has raised hopes of a reset, but economists cautioned that structural problems will take time to resolve. The economy is expected to grow by 1.6% in 2026 and 1.8% in 2027.

“Péter Magyar, the new prime minister-designate, has presented an ambitious economic programme and wants to introduce the euro. However, given the high budget deficit, it will be a difficult task to create the necessary fiscal space for this. Hungary’s recovery will, in any case, take time,” said Sándor Richter, a Hungary specialist at wiiw.

The country has struggled in recent years with high inflation, weak growth, frozen EU funds and an economic model heavily reliant on automotive and battery manufacturing.

Growth model under strain 

More broadly, the institute warned that the region’s traditional growth model is under strain.

“The model that has hitherto been the hallmark of Central Eastern Europe’s success – acting as an extended production line for foreign industrial companies… is clearly under threat,” Grieveson said, citing rising labour costs, weak productivity gains, growing competition from China and declining foreign direct investment.

For the first time in decades, defence spending in the region is matching or exceeding inflows of foreign direct investment as a share of GDP, underscoring shifting priorities amid geopolitical tensions.

Outside the EU, the Western Balkans are expected to post somewhat stronger growth, with the six economies forecast to expand by 2.5% in 2026 and 3.1% in 2027. Turkey is projected to grow by 3.7% in 2026 and 4.1% the following year.

By contrast, the outlook for Ukraine remains bleak as it grapples with the combined effects of Russia’s invasion and the fallout from the Middle East conflict.

The economy is expected to grow by just 1% in 2026, with a possible rise to 2.5% in 2027 under more favourable conditions, though the outlook is highly uncertain.

“Ukraine’s heavy reliance on imports of fuel and fertilisers for its vital agricultural sector means that the war in Iran is hitting Ukraine particularly hard,” said Olga Pindyuk, wiiw’s Ukraine expert.

“We are already seeing neighbouring countries restricting their fuel exports to Ukraine. Should this trend intensify, Ukraine could face serious difficulties,” she added, warning that a prolonged conflict and persistently high oil prices could push the country into recession.

Russia close to stagnation

Russia, meanwhile, is experiencing near-stagnation despite benefiting from higher energy prices triggered by the crisis.

The economy is forecast to grow by just 0.9% in 2026 and 1.5% in 2027, with weak investment, labour shortages and high interest rates weighing on activity.

“The war with Iran is helping to stabilise the Russian budget. The longer it continues, and the longer oil prices remain high or rise further, the more positive the effects will be for Russia,” said Vasily Astrov, a Russia specialist at wiiw.

“After all, for every US dollar rise in the price of crude oil, 58 cents flow into the Russian state coffers,” he added.

However, Astrov noted that the windfall revenues are unlikely to translate into stronger growth, as funds are being used to shore up public finances and reduce borrowing rather than boost investment.

“Russia’s weak growth is primarily attributable to the still high key interest rates of currently 15%, inadequate investment in new production capacity and labour shortages. The high energy prices resulting from the Iran war will do little to change that,” he said.

While higher oil prices may provide short-term fiscal relief for Moscow, economists said they also risk prolonging the war in Ukraine.

“There is no doubt that the Iran war is helping President Putin to continue his war of aggression against Ukraine, as it furnishes him with additional revenue and greater political leeway,” Astrov said.

For now, Eastern Europe remains on a modest growth path, but wiiw warns that while the region has so far weathered the initial shock, its resilience could be tested if the conflict in the Middle East drags on.