EBRD cuts 2026 regional growth forecast as energy, inflation and water risks tighten outlook

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EBRD cuts 2026 growth forecast

Highlights

EBRD's latest Regional Economic Prospects cuts 2026 growth forecast for investment regions by 0.6 percentage points, mainly due to Iraq's oil export collapse, and lifts 2027 outlook by 0.4 percentage points.
Oil prices surge from about U.S.$65 to over U.S.$100 per barrel by April 2026 and gas prices climb more than 70 per cent since February as LNG exports plunge 40 per cent.
Wheat prices rise over one third and are projected to stay high through 2028 as Black Sea grain shipments receive severe disruptions and drought puts 38 per cent of central European and Baltic land at medium or high agricultural drought risk in 2026.

Forecast revisions and main pressure points

As reported by European Bank for Reconstruction and Development, its latest Regional Economic Prospects lowers the 2026 growth forecast for its investment regions by 0.6 percentage points from the June projection, while raising the 2027 outlook by 0.4 percentage points.

The bank says the downgrade is driven largely by a deep recession in Iraq after oil exports collapse, followed by an expected rebound when shipments normalize. Excluding Iraq, the 2026 forecast is still revised down by 0.1 percentage points, reflecting tighter financing conditions, drought in Europe and the Black Sea shipping blockade, while the 2027 view is unchanged.

The report, titled "Running dry," identifies mounting constraints in oil exports, water availability and global savings. It says those pressures are exposing vulnerabilities in energy systems, food supply chains and financing conditions across the EBRD regions.

Inflation remains elevated as energy and food costs stay high. Oil prices rise from about U.S.$65 a barrel before the Middle East conflict to more than U.S.$100 by April 2026, while gas prices have climbed more than 70 per cent since February and seaborne LNG exports have fallen 40 per cent as cargoes from the region largely stop.

Regional exposure and industry impact

Bosnia and Herzegovina, North Macedonia and Moldova face some of the largest increases in import bills because of their dependence on energy imports and indirect exposure to Middle East oil-product supply chains. In the EU, gas storage is only 65 per cent full in August, the lowest level for that month in 15 years, and is unlikely to reach the 90 per cent pre-winter refill target at the current injection rate.

Food supply conditions are also worsening as grain shipments from Ukraine and Russia through the Black Sea are severely disrupted by military attacks on infrastructure and vessels. The report notes that Russia and Ukraine together account for about a quarter of global wheat exports, and says wheat prices have risen by more than a third and are expected to remain elevated through 2028.

Drought is adding further strain, with 38 per cent of land in central Europe and the Baltic states at medium or high agricultural drought risk in 2026, versus an average of 12 per cent since 2010. Low water levels on the Danube and Rhine are also weighing on industrial shipments and reducing hydropower and nuclear generation by around a third, pushing electricity prices higher across interconnected markets.

The bank says the region remains structurally exposed to volatile fossil-fuel prices, with oil and gas accounting for around two-thirds of primary energy use. Chief Economist Beata Javorcik says water scarcity, extreme weather and higher financing costs are compounding high energy costs, underscoring the need for more investment in resilience, including renewables, energy storage and nuclear power.

In our earlier article on rising government borrowing costs, we tracked how a jump in U.S. and Japanese bond yields reflected shifting expectations for Federal Reserve policy alongside renewed strength in oil prices. We also noted that higher yields were tightening financing conditions for governments and amplifying fiscal pressure at a time when energy-driven inflation risks remained elevated.

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