In our latest European Economic Outlook, we consider the potential implications of continued Iran conflict on growth, inflation and interest rates, and the exposure to a more prolonged conflict.
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In our latest European Economic Outlook, we consider the potential implications of continued Iran conflict on growth, inflation and interest rates, and the exposure to a more prolonged conflict.
See page 6 of our report for our latest country level forecasts
Europe once again faces an energy shock following the disruption to the Strait of Hormuz, but the implications are materially different to the 2022 energy price shock triggered by the loss of Nord Stream gas flows. Europe’s direct exposure to Hormuz-linked gas imports is notably smaller than its former reliance on Russian pipeline supplies, limiting the risk of physical shortages, although supply exposure remains elevated in some economies owing to their reliance on Qatari gas. Instead, transmission to Europe is occurring primarily through higher global energy prices, reflecting increased competition for LNG cargos.
Eurozone inflation could average 3.1% in 2026 as rising energy prices drive renewed inflationary pressure across Europe. Increased energy prices are feeding into higher transportation costs, with fuel prices having increased by 55% since the conflict began, providing a key near-term driver of headline inflation.
Our forecast reflects the continued pass-through of elevated oil and gas prices into broader price pressures over the coming months. While energy is expected to remain the primary driver of near-term inflation dynamics, indirect effects are likely to extend the impact of the shock beyond direct energy components, sustaining upward pressure across the wider price basket.
Consumption growth is expected to weaken in the coming months, as consumers face a renewed squeeze on their real incomes driven by higher inflation. Despite weaker demand, we expect consumption to remain the primary driver of economic growth within Europe supported by a relatively robust labour market.
Higher energy costs are eroding purchasing power, while consumer sentiment has deteriorated sharply, pointing to a more cautious spending outlook. The ECB’s Consumer Expectations Survey indicates that households anticipate a marked decline in real income over the next 12 months.
While these expectations may overstate the severity of the real income shock, weaker perceptions are nonetheless likely to weigh on behaviour, with households adjusting spending patterns and reducing discretionary expenditure, as evident by declines in consumer plans for large purchases in the latest consumer surveys.
An energy shock different from 2022 experience for Europe
Europe once again faces an energy shock following the disruption to the Strait of Hormuz, but the implications are materially different to the 2022 energy price shock triggered by the loss of Nord Stream gas flows. Europe’s direct exposure to Hormuz-linked gas imports is notably smaller than its former reliance on Russian pipeline supplies, limiting the risk of physical shortages, although supply exposure remains elevated in some economies owing to their reliance on Qatari gas. Instead, transmission to Europe is occurring primarily through higher global energy prices, reflecting increased competition for LNG cargos.
Inflation on the rise
Eurozone inflation could average 3.1% in 2026 as rising energy prices drive renewed inflationary pressure across Europe. Increased energy prices are feeding into higher transportation costs, with fuel prices having increased by 55% since the conflict began, providing a key near-term driver of headline inflation.
Our forecast reflects the continued pass-through of elevated oil and gas prices into broader price pressures over the coming months. While energy is expected to remain the primary driver of near-term inflation dynamics, indirect effects are likely to extend the impact of the shock beyond direct energy components, sustaining upward pressure across the wider price basket.
Consumers are being squeezed by higher prices
Consumption growth is expected to weaken in the coming months, as consumers face a renewed squeeze on their real incomes driven by higher inflation. Despite weaker demand, we expect consumption to remain the primary driver of economic growth within Europe supported by a relatively robust labour market.
Higher energy costs are eroding purchasing power, while consumer sentiment has deteriorated sharply, pointing to a more cautious spending outlook. The ECB’s Consumer Expectations Survey indicates that households anticipate a marked decline in real income over the next 12 months.
While these expectations may overstate the severity of the real income shock, weaker perceptions are nonetheless likely to weigh on behaviour, with households adjusting spending patterns and reducing discretionary expenditure, as evident by declines in consumer plans for large purchases in the latest consumer surveys.
