The European Commission has downgraded its economic growth forecast for 2026, citing the ongoing conflict around the Strait of Hormuz — a critical chokepoint for global oil and gas shipments — which has sent energy prices soaring across the continent.
In its latest quarterly report, released Thursday, the Commission projects EU-wide growth of just 1.1% next year, a significant cut from the 1.4% anticipated in its autumn forecast. The eurozone outlook is even bleaker, now expected to expand by only 0.9%.
“Before the end of February 2026, the EU economy was expected to continue expanding at a moderate pace, alongside a further decline in inflation,” the report states. “However, the outlook has changed substantially since the outbreak of the conflict.”
Inflation Surge and Consumer Confidence Slump
Inflation across the EU is now forecast to reach 3.1% this year — a full percentage point higher than previously expected — driven primarily by the sharp rise in oil and gas prices as fears of supply disruptions in the Gulf intensify.
The Commission describes the turmoil as “the second such shock in less than five years,” drawing a direct parallel to the energy crisis triggered by Russia’s full-scale invasion of Ukraine in 2022. That earlier crisis exposed Europe’s heavy reliance on imported fossil fuels, a vulnerability now being tested again.
Consumer confidence has already fallen to a 40-month low, according to the forecast, as households brace for higher heating and fuel bills. Businesses face rising operating costs and weakening demand, while investment is expected to slow amid tighter financing conditions and heightened uncertainty. Export growth is also softening as global demand cools.
Despite the deteriorating picture, Brussels insists the bloc is better prepared than during the Ukraine-related crisis. Years of investment in renewable energy, lower gas consumption, and efforts to diversify away from Russian supplies have strengthened Europe’s resilience. “The push towards supply diversification, decarbonisation and lower energy consumption has left the EU economy better placed to absorb today’s shock,” the Commission said.
However, officials acknowledge that risks remain heavily tilted to the downside. Prolonged disruption in the Strait of Hormuz or across wider Middle Eastern supply chains could drive energy prices even higher, derail the expected easing of inflation in 2027, and potentially stall Europe’s recovery altogether. The report also warns that shortages of refined oil products, fertilisers, and other industrial inputs could spread through global supply chains, increasing food and manufacturing costs across Europe.
The crisis is already fuelling tensions among member states over fiscal policy. Italian Prime Minister Giorgia Meloni has urged the European Commission to relax fiscal rules for households and industries struggling with soaring energy costs, arguing that energy security should be treated with the same urgency as defence spending. At the centre of Rome’s request is the EU’s national escape clause, adopted on 8 July, which allows temporary fiscal flexibility for defence expenditure under exceptional circumstances.
European governments are preparing for growing fiscal pressure. Public deficits across the EU are expected to widen as governments increase spending to protect households from rising energy bills while also boosting defence expenditure amid mounting geopolitical instability. The broader economic picture is also being shaped by other global developments, such as the UN's recent downgrade of its global growth forecast, which underscores the interconnected nature of the current crisis.
The Commission’s report serves as a stark reminder that Europe’s energy transition, while progressing, has not yet insulated the continent from geopolitical shocks. As the crisis in the Middle East continues, the bloc faces a delicate balancing act between supporting its citizens and businesses and maintaining fiscal discipline.
