The European Commission significantly revised its growth forecasts for the euro zone downwards on Thursday due to the repercussions of the conflict in the Middle East, which is leading to a jump in inflation on the Old Continent.
Brussels now only forecasts an increase of 0.9% in gross domestic product (GDP) in the 21 countries sharing the single currency this year, whereas it was counting on 1.2% in November.
The euro zone should therefore lose half a point of growth compared to last year.
The slowdown should be particularly pronounced in Germany, the euro zone’s largest economy, with growth now expected at only 0.6% this year, twice as much as anticipated in November.
On the other hand, the French economy should limit the damage with growth of 0.8% hoped for by the Commission, instead of 0.9% previously.
These more pessimistic forecasts arise directly from the surge in oil and energy prices resulting from the war in the Middle East, with inflation expected to rise to 3% this year in the euro zone, where the Commission had previously expected 1.9%.
“The conflict in the Middle East has caused a major energy shock, further testing Europe, already faced with an unstable geopolitical and commercial environment,” acknowledged Economy Commissioner Valdis Dombrovskis.
An even more pessimistic scenario
This more pessimistic diagnosis was confirmed by the latest delivery of the S&P Global PMI index, which shows an acceleration in the contraction of activity within the private sector in May.
For 2027, the European executive hopes for a modest improvement, with growth expected to rise to 1.2% within the euro zone (i.e. 0.2 points less than previously hoped), thanks to a marked slowdown in inflation.
This should drop to 2.3% next year, close to the European Central Bank’s objective set at 2%.
But these forecasts are fragile, because the trajectory of the economy will depend on the evolution of the situation in the Middle East, which remains very uncertain for the moment.
The European executive, which had warned at the beginning of March against the risk of a “major stagflationary shock”, that is to say the association of low growth and high inflation, thus developed an alternative scenario, in which energy prices would continue to rise until the end of the year, and would only start to decline next year.
“In such a scenario, inflation would not slow down and economic activity would not be able to rebound in 2027,” warns Brussels.
With the hypothesis of a crude oil price peaking at $180 per barrel at the end of the year, inflation would exceed Brussels’ forecasts by 0.3 points in 2026 and 1.1 points in 2027, while growth would be half lower, specified Mr. Dombrovskis during a press conference
Déficits aggravés
This crisis is fueling calls within the euro zone to relax European budgetary rules, in particular from Italy, while Brussels will present its biannual assessment of the public finances of member states in June.
But the European Commission, which says it expects a general deterioration in deficits and debt this year, has not deviated from its line: it is still calling on States to limit support measures for businesses and consumers as much as possible to compensate for the surge in energy prices.
“The EU must learn the lessons of past crises by limiting budgetary support to temporary and targeted measures, and by further reducing its dependence on imported fossil fuels”, insists Valdis Dombrovskis, also calling on EU countries to “accelerate the reforms, remove obstacles to growth and preserve the health of its public finances.
Concerning France, Brussels says it is counting on maintaining the public deficit at 5.1% of GDP this year, and an increase to 5.7% in 2027, but “assuming that policies remain unchanged”.
Despite the deterioration of the economic situation, French Prime Minister Sébastien Lecornu has for his part maintained the course of reducing the deficit below 3% of GDP in 2029, and still hopes to bring it down to 5% this year, thanks to a savings plan of 6 billion euros announced in April.
