Overview
BofA Global Research says the euro area will likely avoid a recession even after a pronounced energy shock, but growth is set to remain subdued as higher oil and gas prices weigh on activity and slow the disinflation process. The bank describes the outlook as "a big shock," adding that "a technical recession is avoided" but warning that "the recovery will be shallow."
Revised growth and energy assumptions
The research unit cut its forecast for euro-area GDP growth to 0.6% for this year and 1.0% for the next year. Those revisions rest heavily on energy-price assumptions: Brent crude is modelled near $100 per barrel until late 2026, while Dutch TTF gas is assumed to remain around 80 through the coming winter. The report argues that "some permanent damage to energy supply will prevent a swift correction in global energy prices," keeping elevated input costs in place even if geopolitical tensions ease.
Compared with earlier projections, the updated outlook implies a cumulative loss of 90 basis points of growth. Output is expected to remain below the pre-shock path, and the report suggests the sequential growth recovery from the fourth quarter of 2026 will be modest.
Households and fiscal policy
BofA expects household behaviour to absorb part of the initial shock. The bank projects that "consumers buffer the initial impact with a reduction in the savings rate" in the second quarter of 2026, helping to support demand when energy costs bite. At the same time, discretionary fiscal measures are seen as limited, amounting to roughly 0.2% to 0.3% of GDP.
Inflation path and central bank response
Headline inflation is projected to rise to 3.3% in the current year before easing to 2.1% in the following year, with oil driving a rapid near-term pickup and gas contributing to greater persistence. The report states that "inflation undershoot is delayed," forecasting that headline inflation will not fall below 2% until the second half of 2027 and that core inflation will only slip below that threshold by the end of 2027.
Given the upside risks to inflation, BofA expects the European Central Bank to tighten policy in the near term. The bank forecasts 25 basis point increases in June and July 2026, taking the deposit rate to 2.50%, and then anticipates that rate cuts will not begin until June 2027. The report notes that "the ECB is nervous," reflecting policymakers' concern about inflation persistence.
Country-level divergence
Exposure to the energy shock is uneven across the region. Germany is identified as "the most vulnerable," with its growth forecast reduced to 0.3% this year. Italy's growth is projected at 0.2%. By contrast, France and Spain are expected to perform relatively better, supported by their energy structures and policy measures, though both economies still face slower expansion and higher inflation than previously forecast.
Downside scenarios and caveats
The baseline in the report assumes the shock is confined to higher prices rather than supply shortages. The analysis cautions that a stronger energy shock - with larger and more persistent price increases or actual supply disruptions - "would push the Euro area into recession."
Key takeaways
- The euro area is expected to avoid a technical recession but will experience weaker-than-previously-forecast growth.
- Elevated oil and gas price assumptions (Brent near $100/bbl until late 2026; Dutch TTF around 80 through next winter) are central to the downgrade and to the delay in disinflation.
- Monetary policy is set to remain tighter for longer, with BofA expecting 25 bp hikes in June and July 2026 and cuts not beginning until June 2027.
Impacted sectors
- Energy: direct exposure to higher commodity prices and supply risks.
- Household consumption and retail: consumption smoothing via lower savings anticipated to support activity.
- Financials and fixed income: interest-rate trajectory influenced by ECB moves and inflation persistence.
Risks and uncertainties
- Escalation of the energy shock beyond price increases - actual supply shortages could trigger a recession in the euro area, according to the report.
- Persistent inflation from gas and oil would extend the period of tighter monetary policy, putting additional strain on rate-sensitive sectors and balance sheets.
- Limited fiscal support (around 0.2% to 0.3% of GDP in discretionary measures) may constrain policymakers' ability to offset the shock, leaving households and firms to absorb more of the adjustment.
Conclusion
BofA Global Research views the euro area as narrowly avoiding a recession despite a significant energy-driven shock, but the combination of sustained high energy prices, a delayed disinflation path, and restrained fiscal support points to prolonged weakness. While households are expected to smooth some of the short-term impact by reducing savings, the recovery is forecast to be shallow and uneven across member states. The ECB's near-term posture is set to reflect these inflationary risks, with policy tightening anticipated before cuts begin in mid-2027.