The European Commission lowered its economic growth forecast for the European Union after a new energy shock linked to conflict in the Middle East pushed inflation higher and weakened business confidence across the bloc.
In its Spring 2026 Economic Forecast published on Tuesday, the Commission said the EU economy would continue to grow, though at a slower pace than previously expected.
The Commission now expects EU gross domestic product growth of 1.1 per cent in 2026, down from the 1.4 per cent forecast issued last autumn.
Growth is projected to recover slightly to 1.4 per cent in 2027.
For the euro area, growth is forecast at 0.9 per cent in 2026 and 1.2 per cent in 2027.
The Commission said the outlook changed after the US-Israeli war against Iran triggered another rise in global energy prices.
Officials described the situation as the second major energy shock affecting Europe in less than five years following the impact of Russia’s full-scale invasion of Ukraine.
The report stated that higher energy costs had increased household bills and raised costs for businesses across Europe, reducing profits and slowing investment.
Consumer confidence fell to its lowest level in 40 months as concerns over inflation and employment spread through the economy.
Inflation in the EU is now expected to reach 3.1 per cent in 2026, one percentage point higher than the Commission predicted in its previous forecast. Inflation is projected to ease to 2.4 per cent in 2027 if energy market tensions decline.
In the eurozone, inflation is forecast at 3.0 per cent next year before slowing to 2.3 per cent in 2027.
The Commission said energy prices had already accelerated sharply in March and April. Officials expect energy commodity prices to remain around 20 per cent above pre-war levels even if markets stabilise later in the forecast period.
Private consumption is expected to remain the main source of growth despite weaker confidence and tighter financing conditions.
Business investment is forecast to slow because of lower profits, higher borrowing costs and uncertainty linked to energy markets and global trade tensions.
The Commission also warned that weaker external demand was weighing on European exports.
Employment growth across the EU is expected to slow after labour markets remained resilient in recent years. The Commission forecast employment growth of 0.3 per cent in 2026 after a 0.5 per cent increase in 2025, when more than one million jobs were added across the bloc.
The unemployment rate is expected to stabilise at around 6 per cent by 2027, ending a long decline in joblessness across the EU.
At the same time, governments face rising fiscal pressure. The Commission said higher energy spending, defence costs and weaker economic activity would increase public deficits and debt levels across Europe.
The EU’s combined government deficit is projected to rise from 3.1 per cent of GDP in 2025 to 3.6 per cent by 2027.
The EU debt-to-GDP ratio is expected to increase from 82.8 per cent this year to 85.3 per cent in 2027. In the euro area, debt is forecast to exceed 91 per cent of GDP by 2027.
The Commission said four EU member states were expected to carry public debt levels above 100 per cent of GDP by that point.
Officials warned that the outlook remained uncertain because of continued instability in energy markets and the risk of prolonged supply disruptions.
The forecast included an alternative scenario in which energy prices climb further and remain elevated into late 2026. Under that scenario, inflation would stay high and economic growth would fail to recover in 2027.
The Commission also warned that shortages of commodities such as refined oil products, helium and fertilisers could disrupt supply chains and increase pressure on food prices.
At the same time, the report said investment in energy resilience after the Ukraine war had improved Europe’s ability to absorb external shocks.
The Commission pointed to efforts to diversify energy supplies, reduce consumption and expand low-carbon energy production as factors helping to limit the economic impact of the latest crisis.
The report also identified artificial intelligence as both an opportunity and a risk for Europe’s economy. The Commission said productivity gains linked to AI could support investment, while labour market disruption remained a concern.
The Commission is due to publish its next full economic forecast in November.
HT
