The European Commission has cut its EU growth forecast for 2026 to 1.1%, with inflation expected to hit 3.1% over the year as prices rise due to the war in Iran.
"The conflict in the Middle East has triggered a major energy shock, further testing Europe as it navigates an already volatile geopolitical and trade environment," EU Economy Commissioner Valdis Dombrovskis said on Thursday.
Fossil fuel prices have surged worldwide as a result of the war in Iran and Tehran's blockade of the Strait of Hormuz, a major shipping route.
Inflation in the 27-strong bloc is forecasted to reach 3.1% in 2026, an upward revision of one percentage point compared to the commission's previous forecast published in November.
Consumer prices in the 21-member eurozone are expected to rise by 3% in 2026, up from 1.9% as in the previous forecast.
Rising prices are expected to limit growth in gross domestic product (GDP), with the commission revising its 2026 forecast down 0.3 percentage points to 1.1% for the entire EU and 0.9% in the eurozone.
Earlier this month, the commission warned of a large-scale energy crisis in the EU and said that member countries had already spent an additional €30 billion ($34.9 billion) on fossil fuel imports since the start of the war in Iran in late February.
On Thursday, Dombrovskis urged member states to react to the rising prices with temporary and targeted fiscal support measured and to further reduce reliance on imported fossil fuels.
"Europe should accelerate reforms, remove barriers to growth, and safeguard sound public finances," he said.
Germany's growth forecast halved
Germany is expected to be hit particularly hard by the conflict, with the commission halving its forecast from 1.2% growth down to 0.6% in a further blow to Chancellor Friedrich Merz's hopes for an economic turnaround.
"The energy price shock has raised costs and prices, weighing on real incomes and profit margins, thereby slowing demand," the commission forecast said.
"However, the ramp-up in public spending is set to contribute positively to overall growth. Private consumption is expected to strengthen somewhat in 2027, as uncertainty subsides and sentiment improves."
Germany's GDP is expected to grow by 0.9% in 2027, according to the commission's outlook.
The German government previously cut back its economic outlook for 2026 to 0.5% growth.
