Eurozone growth is expected to slow this year, according to the International Monetary Fund, which revised its forecast downward due to the economic impact of the Middle East conflict and rising energy costs.
In its latest report, the IMF projected that the Eurozone economy will expand by 0.9% this year, 0.5 percentage points lower than its forecast before tensions escalated in late February.
Growth Outlook Reduced for 2026
The IMF also lowered its forecast for Eurozone growth next year to 1.2%, down 0.2 percentage points from earlier estimates.
While growth in 2025 reached 2.9%, slightly above January projections, the Fund warned that momentum is weakening.
It said prolonged energy disruptions could further reduce growth to 2.1%, and in a more severe scenario involving financial market stress, expansion could slow to as low as 1.3%.
Inflation Expected to Rise
At the same time, the IMF raised its inflation forecast for the 21-country Eurozone to 2.8% this year, an increase of 0.8 percentage points compared with January estimates.
Inflation is expected to moderate to 2.3% next year, 0.4 percentage points lower than previous projections.
However, the IMF warned that continued energy supply shocks linked to the conflict could push inflation and inflation expectations higher.
ECB Advised to Tighten Policy Further
Amid concerns over stagflation, the IMF advised the European Central Bank to raise its key interest rates more than previously expected this year.
The ECB recently increased its main interest rate to 2.25%, marking the first hike since 2023, citing inflationary pressures related to the energy shock.
Higher borrowing costs could weigh on demand but may be necessary to anchor inflation expectations.
European Stocks Rise on Hopes of De-escalation
Despite the downgraded growth outlook, European stock markets opened higher on optimism over potential de-escalation in the Middle East.
In early trading:
– France’s CAC 40 rose 1.38%.
– Britain’s FTSE 100 gained 0.68%.
– Italy’s FTSE MIB climbed 1.21%.
– Germany’s DAX advanced 1.34%.
The rally was supported by falling oil prices and hopes for a diplomatic agreement between Washington and Tehran.
Conclusion:
The IMF’s revised projections highlight mounting risks to Eurozone growth amid energy supply disruptions and geopolitical tensions. While inflation remains elevated and policy tightening continues, financial markets appear cautiously optimistic about the prospect of easing tensions in the Middle East.
