The energy-led rise in inflation remains contained. But pressures are building and consumer and services confidence is suffering.
The trade openness of EU countries represents both a strength and a weakness, making active initiatives necessary to enhance economic security. According to the World Bank, in 2024 the EU’s trade openness stood at 92%, compared with 25% for the United States and 37% for China. For Italy, the figure was 63%, among the highest among Member States, with particularly strong exposure to extra-EU demand. The evolution of the international geopolitical and economic context, together with the country’s dependence on the import of energy materials, suggests that careful consideration should be given to the potential vulnerability of Italian imports to possible total or partial disruptions in the external supply of strategically significant products.
According to our forecasts, the impact of the conflict in the Middle East is likely to restrict GDP growth to 1.0% in 2026 and 1.3% in 2027 (down from 1.6% for both years prior to the conflict). Private consumption will be hit by falling real wages (with inflation projected at 3.0% in 2026 and 3.3% in 2027, compared to initial estimates of 1.9% and 2.3%). However, the high savings rate will enable households to mitigate the impact over time. Economic activity could suffer from less favourable interest rate dynamics (we anticipate a 50bp increase in ECB rates in 2026). However, the ongoing investment in defence, AI and electrification is expected to continue and boost intra-EU trade. The expected deterioration in public finances in 2026 will be significantly less severe than in 2022.
The war in the Middle East has caused prices of several commodities to rise, in particular oil which has neared historic highs. Although conflict’s trajectory remains highly uncertain, weaker supply and demand constraints compared to 2022 should limit the upward pressure on inflation. Household consumption and sectors least able to pass on rising production costs to sales prices (primarily consumer goods) are likely to be hit hardest. The ultimate effect on GDP growth will depend on the duration and severity of the damage. According to our baseline scenario, a recession should be avoided. However, if the conflict were to escalate to the point of causing shortages (of fuel or inputs), its impact on growth and inflation could lead to such a recessionary outcome
Activity indices are holding up, but household confidence is eroding. Business sentiment indicators did not falter in March, and prospects of price rises are confined to a few sectors (oil and chemicals). The downturn is, at this stage, less pronounced in services and construction. Household confidence is deteriorating more noticeably against a backdrop of significantly rising inflation expectations and gloomier prospects for economic activity and unemployment.
We have selected a set of indicators to track the impact of this new energy shock, caused by the war in the Middle East, on activity and prices in the Eurozone, the United States, oil and gas markets and emerging countries, and to see how much the current situation resembles the situation in 2022 at the outbreak of the conflict in Ukraine.This dashboard featuring graphs and comments will be updated on a monthly basis for as long as necessary.
The assessment of the available data to date is relatively positive, as the immediate reaction of confidence surveys and inflation was limited and the overall developments were less unfavourable in March 2026 than in March 2022. This is good news, but it does not prejudge what will happen next at all. It is likely that the deterioration observed will continue: the question is by how much.
Most developed countries are ageing rapidly. According to the United Nations population database, the proportion of people aged 65 and over in the group of “more developed countries” is projected to rise from 21.5% in 2026 to 32.3% by 2100. There are however significant differences between countries. Such increases pose a threat to social security systems. Without any specific reforms, pension and healthcare spending will rise while contributions from the shrinking working-age population will decline. Which countries are financially most vulnerable to ageing? We analysed this question for 16 developed countries using five ratios in our ageing vulnerability index.
Will a different situation lead to different outcomes? In other words, will the combination of weaker demand and more moderate supply constraints in 2026, as compared to 2022, help to limit the rise in inflation? Having illustrated the impact of the energy shock caused by the war in the Middle East on six key variables in the Eurozone in our previous Chart of the Week, we now move on to a new comparison between these two dates, this time focusing on the relative levels of supply and demand issues. In the Eurozone, weaker demand has resulted in a more pronounced decline in inflation, unlike in the United States, where both demand and inflation have remained more sustained
Two measures of inflation (including and excluding energy) and six survey data points to track the impact of the latest energy shock—caused by the war in the Middle East—on economic activity and prices in the euro area. This Focus also highlights how closely the current situation mirrors that of 2022, when the conflict in Ukraine began.
Will the same causes produce the same effects? In other words, will the outbreak of war in Iran and the associated surge in oil prices (+44% to date) and gas prices (+64%) lead to an inflationary shock comparable to that of 2022? Will their negative effects on growth be the same as those of the war in Ukraine and the ensuing energy shock (a rise in oil prices of around 30% between 23 February and its peak in early June 2022, and a rise in gas prices of around 210% between 23 February and the peak in late August 2022)? The risk cannot be ruled out. Indeed, there are similarities and numerous uncertainties.
Inflation in both the Eurozone and France is expected to return to levels not seen since the summer of 2024. In March, we forecast 2.6% y/y in the Eurozone (compared with 1.9% in February). In France, where inflation is starting from a much lower base (1.1% in February), it is expected to reach 1.7% y/y in March, rising to 2.1% in May. This rebound in inflation is attributable to the sharp increase in energy prices, which has not yet been passed on to core prices. Business surveys point to a rebound in input prices. However, they do not currently suggest an increase in selling prices in the second quarter, either in France or in the Eurozone. Nevertheless, a rebound in core inflation is expected from the second half of the year
For several years, Central Europe has been facing a marked demographic decline. Its magnitude varies from one country to another. The total population decline from 2004 to 2025 ranges from -0.3% in Slovakia to -17.2% in Bulgaria. The Czech Republic is the only country in the region to have seen a population increase over the same period. The working-age population (ages 15–64) is also declining. However, the situation is less unfavourable in Hungary, Poland, the Czech Republic and Slovakia, while Romania and Bulgaria are experiencing a more significant decline due to migration patterns. Net migration flows were negative for Bulgaria until 2019 and for Romania until 2021. However, this trend has reversed in recent years
The conflict in Iran has put an end to the moderation in commodity prices, which had helped to reduce inflation in Europe. This disinflation enabled the ECB to lower its key interest rate, which contributed to the rebound in growth in 2025. The conflict could reverse these trends, with the extent of the reversal depending on the still highly uncertain outcome of the conflict in the coming weeks.
According to the ECB's Bank Lending Survey (BLS), some banks in the Eurozone may tighten their credit standards for households more significantly in 2026 than in 2025. The reason for this is the more constraining calculation of regulatory capital requirements. In contrast, the tightening would be less severe for corporations. This desynchronisation is unusual. It tends to illustrate the effect of the ramp-up of the output floor, which would particularly affect housing loans. However, the effect would remain very limited: only one in ten banks is considering to change its standards. New loans to households and corporations would keep their momentum largely unchanged.
The US dollar fell again markedly in the second half of January, particularly against the euro. What does this depreciation, which began in early 2025 and follows a long period of appreciation, reflect? What are its effects on the European economy?
Household spending intentions have been improving in the Eurozone for two years, and in January 2026, they returned to their early 2022 levels, despite a much more gradual improvement in the household confidence index. Households’ fears about unemployment and living standards in general have weighed on consumption and have contributed to its moderate growth. Moreover, these fears have continued to dampen consumer sentiment. However, these concerns are easing and no longer seem to be hindering a potential rebound in consumption, as evidenced by purchasing intentions.
Europe is getting better and better. It has not been spared shocks, notably the war in Ukraine – its impact on energy prices is largely responsible for German stagnation – and political uncertainty in France, which affected French GDP growth in 2025. But Europe is overcoming these difficulties. GDP Growth in the Eurozone proved robust, at 1.5%, and 2026 should be a positive year, even more than in 2025. Industry has emerged from recession, buoyed by defence, aeronautics and AI, while households are showing purchasing intentions not seen since February 2022. All these factors will help Europe to continue building its strategic autonomy. The context is favourable and Europe is becoming increasingly credible in the eyes of investors.
The issue of European sovereignty has been on everyone's mind recently. Among its many dimensions, sovereignty in retail digital payments is often cited as an urgent gap to be filled. In fact, two-thirds of digital payments in the Eurozone rely on non-European providers, mainly American. However, this situation is not inevitable, and 2026 could well be the year when a European alternative takes off and reaches critical mass.
In the Eurozone, the improvement in the business climate points to stronger activity. Household confidence remains moderate but spending intentions are rebounding. The unemployment rate is close to its low point, and inflation remains under control.
Lending rates are relative stable since September. Bank financing flows to Eurozone corporations are expanding faster than market financing flows. In France, outstanding loans continue to recover overall.
Today, we're looking at household consumption, which remains the main driver of growth in both the Eurozone and the United States. As we all know, household consumption suffered a major negative shock during the COVID-19 pandemic.
Growth in the Eurozone is expected to strengthen in 2026 (1.6%) primarily driven by investment and a resurgence in activity in Germany. Our forecasts indicate that inflation is likely to remain below the 2% target. However, the anticipated recovery in GDP growth may prompt the ECB to keep its rates unchanged until 2027 before raising them. The fiscal impulse is expected to remain largely neutral, as fiscal consolidation in France and Italy offsets the increase in the German deficit. Interest rates on new loans to households and businesses are projected to remain stable in 2026, with new loans continuing to decelerate for both households and businesses. However, sovereign rates are expected to rise moderately.
2025 saw a renewed appetite among European consumers for electric cars. This enthusiasm comes after a lacklustre 2024, when registrations stagnated following the late 2023 announcement regarding the reduction of budgetary support in France and the complete withdrawal of such support in Germany. Yet, numerous studies, including the joint report by Pisani-Ferry and Mahfouz, had deemed these subsidies crucial.
Since the pandemic, household consumption has evolved very differently between the Eurozone and the United States. In Europe, weak growth in real gross disposable income, moderating wealth effects, and rising real interest rates have dampened demand. In the United States, however, consumption has exceeded what fundamentals would suggest, buoyed by the housing wealth effect and fiscal stimulus. This divergence is likely to narrow, however, with the Eurozone gradually correcting its underperformance, albeit unevenly across countries, while the United States is expected to see an end to its outperformance, without falling into underperformance.
