BRUSSELS — The European Commission on Thursday downgraded economic growth estimates to 1.1 percent, as surging energy prices fueled by the Middle East war cause a slowdown.
In its latest economic forecasts, the EU executive said the conflict will result in higher inflation and public debt across the bloc, as it reduced its expected growth for the EU’s economy from 1.4 to 1.1 percent this year.
But things could get worse yet. The economic growth estimates might be halved if the conflict continues longer than expected, the EU’s economy commissioner, Valdis Dombrovskis, told reporters Thursday.
Rising energy prices are also set to push inflation to 3.1 percent, up by a full percentage point from the fall forecast.
The effects of the energy shock are set to extend into 2027, with growth estimated at 1.4 percent next year.
“This confirms the negative implications of the war in the Middle East on the economy that has led to an economic slowdown,” Dombrovskis said.
The EU’s three largest economies — Germany, France and Italy — are set to grow at 0.6 percent, 0.8 percent and 0.5 percent respectively this year, significantly below the EU average.
The setback comes after years of dismal growth and continuous economic shocks in Europe, from the Russian war in Ukraine to trade tensions with the U.S.
European economies are now grappling with the effects of the closure of the Strait of Hormuz, which has sparked a surge in energy prices for businesses and households.
The severity of the energy shock will depend on when the Strait of Hormuz — which channels 20 percent of global oil traffic — will re-open. Talks between the U.S. and Iran to end the conflict in the Middle East have hit a standstill.
The Commission has used current market expectations on oil prices as the baseline scenario to make its forecasts. But Dombrovskis said that a longer-than-expected closure of the Strait of Hormuz could potentially halve EU growth forecasts for this year and next year.
Regardless of peace talks, the economic effects of the conflict will endure in the coming years. Average government deficits in Europe are expected to rise from 3.1 percent of GDP in 2025 to 3.6 percent in 2027.
Germany’s deficit, which is forecast at 3.7 percent in 2026, is set to significantly exceed the Commission’s three percent threshold. This could result in Berlin entering the EU’s special regime for overspenders, known as the excessive deficit procedure.
The latest forecasts follow bad news from eurozone-wide survey this morning which found that private sector activity shrank in May at the fastest pace in more than two and a half years.
The picture was especially bleak in France, where business activity contracted at the fastest pace in more than five years, marking the fifth straight month of contraction and defying expectations for a slight improvement.
