The European Commission has revised down its growth outlook for the euro area, warning that the outbreak of war in the Middle East has produced a second major energy shock in less than five years and that the severity of the economic impact will hinge on how long the conflict endures.
In a statement on Thursday, the EU executive said that rising oil prices - which have climbed above $100 a barrel - are feeding through to higher inflation and are weighing on confidence among firms and households. The Commission noted that prior expectations had been for continued moderate expansion and a further decline in inflation, but that the outlook has changed substantially since the conflict began.
Under the Commission's central projection, euro zone gross domestic product growth will slow to 0.9% in 2026, down from 1.3% in 2025, before rising to 1.2% in 2027. Those figures compare with the November forecasts, which had put 2026 and 2027 growth at 1.2% and 1.4% respectively.
The EU executive also raised its inflation forecasts, projecting inflation of 3.0% in 2026, up from a prior estimate of 1.9%, and 2.3% in 2027, up from 2.0%. The Commission said these upward revisions reinforce the case for an increase in European Central Bank interest rates.
The ECB is widely expected to raise borrowing costs at its meeting on June 11 after disruption to shipping through the Strait of Hormuz prompted a spike in oil prices and pushed inflation in the euro area well above the bank's 2% target. Financial markets are pricing in one or two further moves in borrowing costs over the following 12 months.
Alternative scenario - longer disruption
Recognising the uncertainty around how long the conflict and trade disruptions will last, the Commission set out an adverse scenario based on prolonged interruptions. That scenario assumes energy prices would peak in late 2026 and only slowly revert to baseline levels by the end of 2027. Under those conditions, the Commission said inflation would fail to ease and the euro area economy would not stage a rebound in 2027.
European Economy Commissioner Valdis Dombrovskis warned that, in the adverse scenario, the forecasts for growth this year and next would roughly halve.
Drivers and constraints on growth
In the Commission's main forecast, domestic consumption remains the primary engine of expansion, despite a marked deterioration in consumer mood. The statement noted that consumer sentiment dropped to a 40-month low when the United States and Israel launched air strikes on Iran.
Business investment is expected to be constrained by tighter financing conditions, reduced profit prospects and heightened uncertainty, while weaker external demand is weighing on export growth. Nonetheless, the Commission pointed to structural shifts that make the EU economy more resilient to the current shock than it was in 2022 following Russia's invasion of Ukraine. Investments in supply diversification, decarbonisation and measures that lower energy consumption were cited as helping to blunt the impact of the energy spike.
Data cutoffs and current conditions
The Commission said the data underlying its forecasts had cutoffs in late April to early May. It added that although a fragile ceasefire is reportedly in place between the U.S. and Iran, the Strait of Hormuz remains effectively closed, sustaining upward pressure on energy prices and keeping risks elevated for the economic outlook.
The Commission's revised forecasts and alternative scenario highlight how sensitive the euro area recovery is to energy market developments and to the persistence of geopolitical disruption. Higher inflation projections and the risk of prolonged supply disturbances have shifted the policy debate toward tighter monetary settings until price pressures clearly moderate.