EU slashes eurozone growth forecast as energy crisis deepens

The eurozone economy is set to grow less than previously expected, the European Union said on Thursday, as the ongoing Middle East war and resulting energy shock weigh on economic performance, News.Az reports, citing AFP.

The European Commission said the single currency area’s economy is now projected to expand by 0.9 percent in 2026, down from an earlier forecast of 1.2 percent.

At the same time, the EU sharply increased its inflation forecast for the 21-nation eurozone this year to 3.0 percent, up from 1.9 percent in the previous outlook and significantly above the European Central Bank’s two percent target.

EU economy commissioner Valdis Dombrovskis highlighted the impact of the Middle East conflict, saying it had “triggered a major energy shock, further testing Europe as it navigates an already volatile geopolitical and trade environment.”

The European Commission said households and businesses will face higher energy costs due to rising fuel prices, which will weigh on overall economic output across the bloc.

Energy prices surged after Tehran retaliated to US-Israeli strikes with attacks on neighbouring countries and effectively shut the Strait of Hormuz, through which around one-fifth of global oil supply previously passed before the war.

As a net energy importer, the 27-member European Union remains highly exposed to fluctuations in global energy prices.

Several EU countries, including Poland and Spain, have attempted to limit energy costs through measures such as tax cuts, fuel price caps, and other interventions, while Brussels has urged governments to adopt temporary and targeted policies.

The EU is currently facing its second major energy shock in a few years, following the crisis triggered by Russia’s 2022 invasion of Ukraine, which drove inflation to double-digit levels.

Dombrovskis said the EU must learn from repeated shocks by “further reducing its reliance on imported fossil fuels.”

The Commission warned that the conflict is creating a “stagflationary shock” in Europe, where slower growth coincides with higher inflation.

It also revised down its forecast for overall EU growth in 2026 to 1.1 percent, compared with a previous estimate of 1.4 percent.

Brussels cautioned that uncertainty remains over the duration of the conflict, warning that Europe could face a worse scenario if energy prices continue to rise through the end of the year. In such a case, inflation would remain elevated and economic activity would fail to recover in 2027, it said.

The new projections mark a sharp shift from earlier expectations that the European economy would grow steadily and inflation would remain near the ECB’s target.

Earlier forecasts in November had predicted Germany, the EU’s largest economy, would grow by 1.2 percent this year, but this was cut sharply to 0.6 percent in the latest update.

Looking ahead, the Commission expects conditions to improve slightly in 2027 if energy market tensions ease, though it still lowered eurozone growth expectations to 1.2 percent from 1.4 percent.

For the EU as a whole, growth in 2027 was also revised down to 1.4 percent from 1.5 percent.

Brussels said energy prices are expected to gradually decline, with eurozone inflation projected to fall to 2.3 percent in 2027, up from an earlier estimate of 2.0 percent.

News.Az 

By Nijat Babayev