Economic growth in the eurozone is slowing in early 2026, as the war with Iran heightens fears of stagflation and undermines business and household confidence.
According to preliminary Eurostat data published on Thursday, the region's gross domestic product grew by 0.1% in the first quarter, compared with 0.2% at the end of 2025. On an annual basis, growth reached 0.8%. The result was below expectations of 0.2% and reflected a sharp deterioration in sentiment following the US and Israeli military action against Iran in early March.
France reported a stagnation compared to the previous quarter, while Germany beat expectations with growth of 0.3%. Italy and Spain also performed better than expected, despite the slowdown.
The escalation of the conflict and the subsequent surge in oil prices are changing the economic outlook. The German government has cut its growth forecast to 0.5%, and the International Monetary Fund has revised its expectations for the eurozone to 1.1% for 2026 from 1.3%, warning of the risk of a stagflationary environment.
Inflation is accelerating, with the headline index reaching 3.0% in April. Core inflation eased slightly to 2.1%, but monthly price growth remained robust at 0.9%.
Surveys point to further weakening economic activity. The S&P Global Purchasing Managers’ Index returned to contraction in April after 15 months of growth, while consumer inflation expectations rose sharply.
The European Central Bank faces a difficult choice: whether to rein in inflation without deepening the economic slowdown. Data from its quarterly survey show that banks are already tightening lending conditions and raising interest rates.
The ECB is expected to keep policy unchanged at its current meeting, but markets are pricing in a rate hike as early as June and further hikes by the end of the year.
Some economists have warned of the risk of the central bank overreacting to a supply shock. "I think the ECB is on track to make a mistake in 2026 to make up for the mistake it made in 2022," said Jean-François Robbin of Natixis, stressing that growth is already weak and unemployment is rising in major economies.