By Ed Frankl
The eurozone's two largest economies had a contrasting start to the year, with Germany accelerating a little and France slowing down, as both face a jump in energy prices that is set to weaken consumer spending and derail a hoped-for recovery in industry.
The conflict in the Middle East is the latest blow to Europe's hopes for a sustained revival in its economic fortunes, after Russia's invasion of Ukraine in 2022 and President Trump's tariff blitz last year.
"The economy looked all set for a gradual recovery this year. The war in the Middle East has changed this. The adverse impact on the eurozone will only increase," said Carsten Brzeski, global head of macro for ING Research.
Gross domestic product in Germany--the eurozone's largest member--rose 0.3% in the first quarter of the year, a little up from the 0.2% growth in the final three months of 2025, the country's statistics agency Destatis said Thursday. Both household and government spending accelerated compared with the prior quarter, while exports were also up, it said.
By contrast, GDP growth flatlined in France and eased to 0.6% in Spain, in data also published Thursday, with both countries showing a downturn in household consumption and falling exports. In Italy, growth also slowed to 0.2% from 0.3%.
As a net importer of energy, Europe is more exposed to the surging energy prices driven by conflict in the Middle East than the U.S. The European Union has spent an extra 27 billion euros, or around $31.5 billion, on energy imports due to higher prices since the first strikes on Iran at the end of February, European Commission president Ursula von der Leyen said Wednesday.
The European Central Bank, which announces its interest-rate decision later Thursday, last month cut its forecast for eurozone growth this year to 0.9% from the 1.2% it predicted in December, and trimmed its forecast for 2027.
But the slowdown is likely to be more severe if the Strait of Hormuz remains closed to shipping for much of what remains of the year. Brent crude oil this week climbed above $120 a barrel, reflecting skepticism about the prospects for an early resumption of oil and natural gas flows through the choke point.
ECB President Christine Lagarde said earlier this month that the eurozone is currently between the bank's baseline and an adverse scenario that predicts a weaker 0.6% GDP growth this year. An even more severe scenario envisaged 0.4% growth.
"We are definitely moving towards the adverse scenario," said ING's Brzeski.
Surveys show Europeans are already feeling more fearful about the future. Consumer confidence in the eurozone sank to its lowest since December 2022, a time when inflation in the currency area was coming off double-digit highs.
Business confidence has also worsened. Germany's closely watched Ifo business-climate index nosedived to its lowest level since May 2020, when businesses were being hammered by lockdowns and restrictions as the Covid-19 pandemic spread globally. Surveys of purchasing managers in the eurozone showed activity at its weakest in 17 months in April, with output contracting and input and selling prices rising at their sharpest rates in more than three years.
A fresh headwind might come in the form of higher interest rates. While the ECB has yet to respond to the pickup in inflation, investors expect it to act soon if there isn't any sign of a cooling in energy prices.
Figures released in recent days show inflation picking up in Germany, France and Spain, with eurozone inflation due later Thursday.
ECB policymakers will be gauging to what extent energy prices feed into more underlying price pressures in the economy, such as via demands for higher wages, which could lead to an inflationary spiral. However, they could also be attentive to stagflationary concerns, should high inflation be paired with stagnant economic growth.
Write to Ed Frankl at edward.frankl@wsj.com
(END) Dow Jones Newswires
04-30-26 0459ET
