Spring of discontent

The EU’s Spring Economic Forecast shows a slowdown in growth as the energy shock drives up inflation and puts new strain on public finances. It has not, to say the least, been the most promising of weeks for Europe’s economy. On May 21, the European Commission released its Spring Economic Forecast which, somewhat predictably, shows a slowdown in growth as the energy shock caused by the US war on Iran drives up inflation.

Before the war began at the end of February, the European Union’s economy was set to keep expanding (albeit at a moderate pace) alongside a further decline in inflation. The outlook, however, has changed substantially since the outbreak of the conflict. Inflation started picking up quickly, driven by the sharp increase in energy commodity prices, and economic activity is losing momentum. The situation is set to improve slightly in 2027, but only if tensions on energy markets ease. After reaching 1.5 per cent in 2025, GDP growth in the EU is now projected to slow down to 1.1 per cent in 2026, a downward revision of 0.3 percentage points from the Autumn 2025 Economic Forecast projection (1.4 per cent). GDP growth is then set to edge up to 1.4 per cent in 2027. Growth projections for the euro area are similarly revised down, to 0.9 per cent in 2026 and 1.2 per cent in 2027, from 1.2 per cent and 1.4 per cent respectively. Of the EU’s major economies, Poland is set for the highest growth this year, at 3.5 per cent, although even that is down from 3.6 per cent in 2025. At the other end of the scale, there will be concerns about Romania, currently without a permanent government, where the economy will stagnate (growing, if we can call it that, by just 0.1 per cent this year). Inflation in the EU is expected to reach 3.1 per cent in 2026, a full percentage point higher than previously forecast, easing again to 2.4 per cent in 2027. In the euro area, inflation is also revised up to three per cent in 2026 and to 2.3 per cent in 2027, compared to the autumn projections of 1.9 per cent and two per cent respectively. As a net energy importer, the EU’s economy is highly susceptible to the energy shock caused by the conflict in the Middle East, the second such shock in less than five years (the previous shock being Russia’s ongoing invasion of Ukraine).

Key points

• Before the war began at the end of February, the European Union’s economy was set to keep expanding (albeit at a moderate pace) alongside a further decline in inflation.
• The outlook, however, has changed substantially since the outbreak of the conflict.
• Inflation started picking up quickly, driven by the sharp increase in energy commodity prices, and economic activity is losing momentum.
• The situation is set to improve slightly in 2027, but only if tensions on energy markets ease.
• After reaching 1.5 per cent in 2025, GDP growth in the EU is now projected to slow down to 1.1 per cent in 2026, a downward revision of 0.3 percentage points from the Autumn 2025 Economic Forecast…