Economic growth across Europe and Central Asia (ECA) is set to slow, with the World Bank projecting a moderation to 3.3% in 2024, slightly down from 3.5% in 2023.

This deceleration reflects the region’s ongoing struggle to regain momentum, trailing its pre-pandemic average growth rate of 4.1% recorded between 2000 and 2019. The slowdown is particularly critical for middle-income countries in the region as they strive to attain high-income status.

The subdued growth forecast for 2024 highlights the varied economic performances among ECA countries. Half of the region, including its largest economies—Russia and Türkiye—is expected to experience a downturn. Contrastingly, Poland, the third-largest economy in the region, is on track for a remarkable recovery. Following a modest 0.2% growth in 2023, Poland’s economy is projected to expand by 3.2% in 2024, largely driven by a resurgence in household consumption.

Poland’s rebound underscores the importance of domestic consumption in sustaining growth amid external challenges. This divergence among economies underlines the uneven recovery trajectory within the ECA region.

Private Consumption as a Growth Engine

Private consumption remains the cornerstone of economic activity in the ECA region. The World Bank attributes this resilience to favorable fiscal policies that have bolstered domestic demand. Rising real wages, increased social transfers, and robust credit growth have collectively fueled consumer spending.

However, the region’s economies are grappling with weak external demand, exacerbated by subdued activity in the European Union, a significant trading partner. This external drag underscores the challenges of relying on domestic demand alone to sustain growth.

Headline inflation in the ECA region has shown signs of easing, with the median annual rate declining to 3.6% by August 2024, down from 4.6% at the end of 2023. This marks progress, albeit inflation remains higher than the 2.7% average observed in the pre-pandemic period of 2018–2019.

A reduction in goods inflation has been a key driver of this decline. However, services inflation continues to remain elevated, primarily due to rising labor costs across the region. These dynamics reflect the mixed progress on inflation, with some central banks cautiously reducing policy interest rates. However, the rate cuts remain modest, reflecting a conservative approach to monetary policy amid lingering inflationary risks.

The fiscal space across the ECA region has faced significant pressures in 2024, with many countries deferring consolidation efforts. Government spending has surged, outpacing revenue gains and adding to fiscal imbalances.

Key contributors to the increased spending include hikes in public sector salaries, pensions, minimum wages, social benefits, and defense budgets. While these measures aim to support household incomes and address socio-economic challenges, they have also exacerbated fiscal pressures.

The World Bank’s report emphasizes the urgency of structural reforms to address these imbalances. Without decisive action, fiscal vulnerabilities could undermine the region’s long-term economic prospects.

A Path to Sustainable Growth

As the ECA region navigates a fragile global economic environment, the need for structural reforms has become increasingly apparent. The World Bank highlights several priority areas for reform, including enhancing fiscal discipline, addressing inflationary pressures, and fostering a more conducive environment for investment and innovation.

By tackling these structural challenges, ECA countries can pave the way for more robust and sustainable growth. This is particularly important for middle-income countries aspiring to transition to high-income status, as well as for maintaining economic resilience amid external shocks.

The projected moderation in growth for 2024 underscores the uncertain and uneven recovery trajectory across the ECA region. While domestic consumption continues to drive growth, external challenges, inflationary pressures, and fiscal imbalances pose significant risks.

Poland’s recovery offers a glimpse of the potential for strong domestic policies to mitigate external headwinds. However, the broader regional outlook remains cautious, with the need for structural reforms more urgent than ever.