Our economic outlook for the euro area

The euro area is relatively exposed to the Middle East conflict as it is a net energy importer. Our 2026 GDP growth forecast is 0.8%, down 0.4 percentage points from our pre-conflict forecast, as we expect higher energy prices and tighter financial conditions to slow economic activity. This forecast is conditional on a scenario in which oil prices average $90–$100 per barrel for one to two quarters.

Early evidence suggests the direct impact of higher energy prices is feeding into consumer prices quickly and supply chains are being disrupted. However, the magnitude of second-round effects is likely to be weaker than with the 2022 Ukraine shock. This is because the euro area came into this latest shock from a position of relative strength, with headline inflation close to 2%, inflation expectations well anchored, and a labor market that was not particularly tight.

We now expect the European Central Bank (ECB) to raise rates by 50 basis points in 2026, with the first increase coming as early as its June meeting. We see these as “insurance hikes.” The Governing Council has articulated that it will adopt a risk management approach to lean against potential second-round effects from the Middle East shock. We expect policy to reverse and two cuts to materialize in 2027 as the energy shock fades.