European Commission cuts GDP outlook as 'energy shock' ignites inflation fears

21st May 2026 11:35

(Sharecast News) - The European Commission has slashed its growth forecasts for the eurozone and wider EU as a result the "energy shock" caused by the Iran war, adding a whole percentage point to its inflation projection this year.

The EU's main executive body said it now expects the EU economy to expand by just 1.1% in 2026, down from an earlier forecast of 1.4%, after growing by 1.5% in 2025. Growth is then expected to accelerate to 1.4% in 2027, marking a 0.1 percentage-point reduction from its Autumn Forecast in November.

The eurozone GDP growth estimate for 2026 was also cut by 3pp to 0.9%, a significant slowdown from the 1.4% growth registered in 2025. The 2027 growth forecast was lowered by 2pp to 1.2%.

The EC said the outbreak of conflict has "materially changed" the growth outlook, given the Gulf's major role as an oil refiner and pathway for fuel exports. It noted that gas and crude oil prices had surged 50% and 65% respectively between 27 April - the day before the US and Israel's first attacks on Iran - and the end of April.

The inflation forecast for the EU has been lifted by 1.0pp to 3.1% this year, marking an acceleration from 2.5% in 2025, before slowing to 2.4% in 2027.

Eurozone inflation is now expected to pick up to 3.0% this year from 2.1% in 2025, before easing to 2.3% in 2027. The EC had originally expected inflation to reach the European Central Bank's 2% target in 2027.

"Futures energy prices - which underpin the technical assumptions to the forecast - point to a relatively swift, albeit partial, normalisation of supply conditions, with oil and gas prices expected to peak in the current quarter and decline to around 20% above pre-war levels by end 2027," the EC said.

However, it noted an "unusually high degree of uncertainty regarding the future path of energy commodity prices".

A more severe and long-lasting disruption to energy supply would result in global growth and economic sentiment being hit harder, "further dampening the baseline's projected easing of inflation and wiping out the rebound in real GDP projected for 2027", the EC said.