EU cuts growth outlook, warns higher inflation

The European Commission on May 21 cut its 2026 growth forecasts for the European Union and the euro area and raised its inflation outlook, saying the conflict in the Middle East had triggered a new energy shock. The Commission’s spring forecast put 2026 growth at 1.1% for the EU and 0.9% for the euro area, while projecting inflation at 3.1% and 3.0% respectively. It said the weaker outlook reflected higher oil and gas prices, softer sentiment and tighter financial conditions. Reuters reported separately on May 21 that euro-zone business activity contracted in May at the fastest pace in more than two and a half years, with services demand weakening and layoffs accelerating. That added a fresh signal that the bloc’s slowdown is broadening beyond energy costs into domestic demand and employment. (economy-finance.ec.europa.eu) ### What exactly did Brussels change in its forecast? The European Commission said 2026 GDP growth is now seen at 1.1% in the EU and 0.9% in the euro area, with 2027 growth at 1.4% and 1.2%. It forecast 2026 inflation at 3.1% in the EU and 3.0% in the euro area, before easing in 2027 to 2.4% and 2.3%. (economy-finance.ec.europa.eu) The Commission said those figures marked a deterioration from its earlier outlook, and tied the revision to the rise in energy prices after the outbreak of the conflict in the Middle East. In its executive summary, it said the energy shock had “reignited inflation and shaken economic sentiment.” (economy-finance.ec.europa.eu) ### How much of this is about energy prices? The Commission’s forecast said the baseline assumes higher oil and gas prices feeding through to consumer prices, corporate costs and household spending. A separate scenario analysis published with the forecast said a longer period of elevated energy prices would further weaken growth and push inflation higher. (economy-finance.ec.europa.eu) The European Central Bank had already flagged the same risk. In its March economic bulletin and March monetary policy statement, the ECB said the war in the Middle East had created upside risks to inflation and downside risks to growth because energy prices were expected to be higher. ### What do the latest business surveys show? (economy-finance.ec.europa.eu) May survey data pointed to a more immediate hit to activity. Reuters reported that euro-zone activity shrank at the fastest pace in over two years, with weakness centered on services and accompanied by faster job cuts. That matters because services had been one of the more resilient parts of the bloc’s economy. (ecb.europa.eu) The Commission’s own forecast kept unemployment broadly stable for the EU at 6.0% in 2026 and 2027, while seeing euro-area unemployment at 6.4% in both years. Those annual projections now sit against weaker high-frequency data from May. ### Is the ECB now under more pressure? (economy-finance.ec.europa.eu) The ECB left rates unchanged on April 30 and said “the upside risks to inflation and the downside risks to growth have intensified.” President Christine Lagarde said the Governing Council would stay data-dependent and would not pre-commit to a rate path. That leaves the central bank facing a more difficult mix before its next decision. (economy-finance.ec.europa.eu) The Commission is forecasting inflation still above target in 2026, while growth has been marked down and business surveys have weakened. ### When is the next decision point? (ecb.europa.eu) The ECB’s next monetary policy meeting is scheduled for June 10-11 in Frankfurt, with the press conference on June 11. The Governing Council’s April 30 statement said future decisions would depend on incoming economic and financial data, underlying inflation and the strength of policy transmission. (ecb.europa.eu) (economy-finance.ec.europa.eu)