Brussels (Belgium) (AFP) – The eurozone economy will expand less than expected this year, the EU said Thursday, as the Middle East war and subsequent energy shock take their toll. The European Commission stated that the single currency area’s economy is expected to grow by 0.9 percent in 2026, down from a previous prediction of 1.2 percent.
The EU also sharply raised its prediction for inflation in the 21-nation eurozone this year to 3.0 percent, up from 1.9 percent in the last forecast and well above the European Central Bank’s target of two percent. EU economy chief Valdis Dombrovskis pointed to the conflict in the Middle East, which “triggered a major energy shock, further testing Europe as it navigates an already volatile geopolitical and trade environment.”
Households and businesses will have to pay more for energy because of the spike in fuel prices, which the EU said is pushing the bloc’s economic output down. Energy prices surged after Tehran retaliated to US-Israeli strikes with attacks on neighboring countries and effectively closed the Strait of Hormuz, through which a fifth of the world’s oil supply transited before the war. Since the European Union is a net energy importer, the 27-nation bloc is extremely vulnerable to any fluctuations in energy prices.
Many EU states, including Poland and Spain, have sought to contain energy costs for consumers and businesses with tax reductions, caps on fuel prices, and other measures. However, Brussels has urged countries to take temporary and targeted steps. The EU is facing its second energy shock after a first crisis following Russia’s 2022 invasion of Ukraine, which led to double-digit highs in inflation. Dombrovskis said the EU has to learn from these shocks by “further reducing its reliance on imported fossil fuels.”
The forecasts come after the EU warned that the war was causing a “stagflationary shock” in Europe, where slower growth coincides with higher inflation. The commission predicted that growth in 2026 will be 1.1 percent for the European Union as a whole, another downward revision from the previous forecast of 1.4 percent. However, with uncertainty over how long the Middle East conflict will last, Brussels warned that Europe could face a worse scenario if energy prices keep rising until the end of the year.
“Under this scenario, inflation would not ease, and economic activity would fail to rebound in 2027,” the commission said. Assuming gas prices and oil prices rise further, with oil peaking at $180 per barrel by the end of the year, Dombrovskis told journalists that inflation would exceed the EU’s forecast by 0.3 percentage points in 2026 and 1.1 percentage points in 2027. He added that the economy would grow roughly half of what Brussels had forecast.
This announcement reflects a marked change from how the EU thought the European economy would fare, with expectations that it would expand—albeit at a moderate pace—and that inflation would remain in line with the ECB’s two-percent target. There had also been high hopes in November that Germany, the EU’s largest economy, would rebound this year and grow by 1.2 percent overall, but that was sharply cut to 0.6 percent on Thursday.
France, the second-biggest EU economy, is expected to perform better, with growth of 0.8 percent anticipated this year. The EU executive expects 2027 to be a better year, though it still cut its forecast for economic growth in the eurozone to 1.2 percent, down from the predicted 1.4 percent in November. For the EU as a whole, Brussels trimmed its 2027 growth forecast to 1.4 percent from 1.5 percent. Furthermore, Brussels expects energy prices to fall gradually, and eurozone inflation is projected to reach 2.3 percent in 2027, up from the previous prediction of 2.0 percent.
© 2024 AFP
