Key Takeaways
The European Union’s economy is facing a significant risk of stagflation as the ongoing conflict in the Middle East disrupts energy markets, potentially cutting growth by up to 0.4 percentage points this year, a top official warned on April 9.
"The Middle East war has caused disruptions in the supply chain of the global energy market and a sharp rise in energy prices," European Commissioner for Economic Affairs Valdis Dombrovskis said in a speech to the European Parliament. He added that the EU faces the risk of stagflation, a scenario where slowing economic growth combines with accelerating inflation.
The warning comes as fresh data shows the conflict's toll on the European economy. S&P Global's Composite Purchasing Managers' Index for the eurozone fell to 50.7 in March from 51.9 in February, indicating a sharp deceleration in private sector expansion. Headline inflation in the eurozone is now running at 2.5 percent, prompting European Central Bank governing council member Dimitar Radev to state the bank may need to raise interest rates quickly to control price pressures.
This confluence of slowing growth and rising inflation puts the European Central Bank in a difficult position. Hiking rates to fight inflation, which has already surpassed the bank's 2 percent target, could further stifle an already deteriorating economic outlook. The ECB is concerned that businesses and consumers could begin to expect high energy prices, triggering an inflationary spiral of higher wages and prices that would be costly to contain.
The economic impact is already being felt across the continent. Surging energy costs have pushed inflation higher and squeezed household budgets, while businesses are contending with disruptions to supply chains and volatile raw material prices. According to Chris Williamson, chief business economist at S&P Global Market Intelligence, "the eurozone economy has already been hit hard by the war in the Middle East."
In the United Kingdom, which faces one of the biggest hits to economic growth among major economies according to the OECD, businesses are navigating their second major reset in operating costs in just a few years. Alan Bridle, an economist at Bank of Ireland UK, noted that beyond energy, impacts will likely "ripple through sectors, including transport, freight, packaging, insurance, fertiliser and food."
In response to the crisis, the European Bank for Reconstruction and Development (EBRD) has launched a conflict response package to deploy €5 billion in investments during 2026. The funds will target economies directly affected by the conflict and neighboring countries facing spillover effects, including Egypt and Türkiye.
EBRD President Odile Renaud-Basso said the bank is "stepping up where others may pull back" to support economic activity and ensure the continuity of essential services. The response will focus on strengthening energy security with liquidity for utilities, providing working capital to private firms to help them absorb market volatility, and ensuring the stability of the financial sector. The plan aims to lay the foundations for a sustainable recovery by safeguarding human capital and protecting vulnerable groups.
This article is for informational purposes only and does not constitute investment advice.
