By Ed Frankl
The eurozone economy weakened at the start of the year, and is likely to struggle ahead as a jump in energy prices curbs consumer spending and delays 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 the eurozone grew 0.1% in the first quarter, down from 0.2% growth in the final three months of 2025, European Union statistics agency Eurostat said Thursday. A consensus of economists polled by The Wall Street Journal expected 0.2% growth.
Among member states, there were contrasting results. Germany's economy accelerated on a pickup in household and government spending. But in France, GDP flatlined on retreating private consumption and declining exports, while growth slowed in Italy, Spain, and the Netherlands, data showed.
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 $31.53 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 held its key rate at 2.0% on 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 at the bank's press conference Thursday that the eurozone is moving away from the bank's baseline toward a more adverse scenario stenciled last month that predicted a weaker 0.6% GDP growth this year. An even more severe scenario envisaged 0.4% growth. But she balked at suggestions that the economy was stagnating.
"It's lower growth, granted...but we're not in stagnation let alone in recession," she told reporters. "You can imagine scenarios where we're heading toward those situations. But this is not what we're seeing for the moment."
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. However, the eurozone's job market remained strong as the first quarter drew to a close, with the unemployment rate equaling a record low at 6.2% in March.
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 also released by Eurostat Thursday show inflation in the eurozone rose to 3.0% in April from 2.6% in March, hitting its highest level since September 2023.
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 low economic growth.
However, Lagarde said Thursday she would rather "park" that term in the 1970s, a time of more sustained inflation and high unemployment.
"We don't apply 'stagflation', that flashy term, to the circumstances that we have because we really think that it's associated with the 70s," she said.
Write to Ed Frankl at edward.frankl@wsj.com
(END) Dow Jones Newswires
04-30-26 1048ET
