The Conference Board Economic Forecast for the Euro Area Economy

 War in Iran update (April 15-May 19). Over the past month, the April ceasefire between the US and Iran has remained fragile. Talks have stalled, with the main disputes centered around reopening the Strait of Hormuz, lifting the US naval blockade on Iranian ports, sanctions relief and Iran’s nuclear program. Tehran is seeking recognition of its role in managing transit through the Strait of Hormuz, including reported permit or toll arrangements, as well as sanctions relief and access to frozen assets. Washington is insisting on freedom of navigation through the strait, no tolls, and a major rollback of Iran’s nuclear activities. To date, security conditions around the Strait have deteriorated further. A vessel was seized off the UAE coast and taken toward Iranian waters, while an Indian-flagged cargo ship sank off Oman after an attack, underscoring ongoing risks to commercial shipping. Iran has also continued to tighten its control over vessel transit through the new Persian Gulf Strait Authority, while the US and Gulf partners continue to press for freedom of navigation and an end to tolls. Timely IMF data show that maritime flows in the Strait remain severely constrained with shipping activity more than 90% below last year’s levels. For the EA, ongoing tensions in the Middle East will continue to weigh directly on the growth outlook primarily through elevated energy prices, higher uncertainty and weaker purchasing power. With Brent oil prices around $110/barrel and Dutch TTF gas around €50/MWh, inflationary pressures will remain higher, while household purchasing power, business margins and industrial activity will come under renewed pressure. This keeps stagflationary risks elevated for the region, especially if maritime disruptions persist and energy markets remain volatile.

Euro Area growth slowed down in Q1... Flash GDP estimates from Eurostat showed EA GDP quarter-on-quarter growth decelerated from 0.3% in Q4 2025, to 0.2% in Q1 2026. Though contributions details are not available yet, some country-level data point to a mixed growth picture among leading European economies. Flash estimates showed Germany remained resilient in Q1 (+0.3% q/q, unchanged from Q4), supported by stronger public and private spending. Italy returned closer to its structurally weak growth trend (+0.2% q/q, down from 0.3% in Q4), while Spain remained the bloc’s strongest performer, expanding by 0.6% (down from 0.8% in Q4). France, however, disappointed, with the EA’s second-largest economy stagnating in Q1 (0.0% q/q) after expanding by 0.2% in the previous quarter, amid broad-based declines in private and public spending, private investment, and exports.

… while Q2 momentum remains subdued. Looking ahead, we continue to expect the impact of the conflict in Iran to be felt more strongly in Q2. Business surveys and high-frequency indicators point to weakening growth momentum across the region. Business confidence declined for a second consecutive month in April, falling to its lowest level since early 2023, as uncertainty, tighter financing conditions, and higher input costs weigh on activity. Consumer confidence also deteriorated sharply, reflecting growing concerns about both the broader economic outlook and households’ near-term financial situation. There is also increasing evidence that companies are passing higher costs onto consumers, adding to inflationary pressures and weighing on export competitiveness. Finally, the prospect of higher US tariffs on key EU exports, particularly autos, could further dampen growth in 2026. In conclusion, following the significant downward revisions to the EA growth outlook in March, and with Q1 flash estimates broadly in line with our previous assessment, we are leaving our annual growth forecasts unchanged. We continue to expect EA growth of just 1.0% in 2026, followed by a modest improvement to 1.1% in 2027, as elevated uncertainty and a gradual only normalization in oil and natural gas prices continue to weigh on the economy in the near term.

Inflation reached 3.1% in April, with risks tilting clearly to the upside. As expected, EA inflation increased to 3.1% in April, with most of the rise driven by energy. Annual energy inflation reached 10.9%, its highest monthly reading since February 2023. Food inflation also edged up to 2.5% year-on-year, from 2.4% in March. By contrast, core inflation, which excludes volatile food and energy prices and is a key measure of underlying price pressures, remained unchanged at 2.2%. Among the main components, annual goods inflation rose to 0.8%, from 0.5% in March, while services inflation eased to 3.0%, from 3.2%. Looking ahead, headline inflation is likely to remain elevated in 2026, as energy prices stay above their pre-war levels. Disruptions to food supply chains caused by reduced maritime activity through the Strait of Hormuz, including potential fertilizer shortages, could also add upward pressure to food prices in the coming months. Core inflation, however, is likely to be more contained. For goods, European businesses have shown a stronger intention to pass part of the increase in input costs onto consumers. However, a stronger euro and weaker external competitiveness could offset some of this pressure. For services, price growth is likely to continue moderating, as easing wage growth dynamics should help contain domestic inflationary pressures. Taken together, we still see headline inflation rising to around 3.0% in 2026, before falling closer to 2.5% in 2027. Core inflation, by contrast, is expected to remain better anchored around the ECB’s 2% medium-term objective, decelerating from 2.4% in 2025 to 2.3% in 2026 and 2.2% in 2027.

Prepare for a rate hike in June, and then… the unknown. Following April’s pause, the ECB is now largely expected to hike in its next meeting in June by 25 basis points, lifting its main policy rate at 2.25% as European policymakers agree that the Middle East energy shock is no longer viewed as temporary and are becoming more concerned about potential second-round effects. At this stage, a June rate hike should be mostly viewed as a pre-cautionary measure, rather than as the start of a prolonged tightening cycle. Inflation has risen mainly because of energy prices, while broader spillovers remain limited and wage indicators continue to point to cooling labor-cost pressures rather than a repeat of the 2022-2023 wage-price spiral. The ECB’s latest wage tracker for instance shows negotiated wage growth stabilizing around 2.6% in 2026, down from 3.0% a month ago. At the same time, longer-term inflation expectations remain broadly anchored around 2% in market-based and professional surveys, although recent consumer survey data suggest some upward drift. The key risk lies in whether this shift becomes more pronounced: if medium-term expectations move further away from target, or if higher energy costs feed more broadly into price-setting behavior across goods and services, additional rate hikes cannot be ruled out. For now, though, one June hike followed by a wait-and-see stance remains, in our view, the most plausible path, with monetary policy conditional on whether the energy shock fades or becomes embedded in underlying inflation.

The war in Iran will test the resilience of the EA labor market in the coming months. The unemployment rate edged up from 6.2% in March to 6.3% in April but remains close to historic lows. Employment also increased by 0.1% q/q in Q1 2026, or 0.6% y/y, suggesting that firms continued to expand moderately payrolls despite elevated uncertainty and softer labor demand. This continued labor market strength should help cushion the EA economy as it enters the second half of the year. However, resilience can no longer be taken for granted, particularly as forward-looking indicators are weakening markedly. The European Commission’s employment expectations indicator fell to 91.7, its lowest level since January 2021, pointing to more cautious hiring plans, while consumers’ unemployment fears have risen significantly in recent months. Overall, while the labor market remains supportive, downside risks are also building rapidly, suggesting that the EA’s labor market resilience may come under increasing pressure in the months ahead.

We highlight one key downside risk to the EA’s growth outlook that seems to have subsided according to latest updates:

Recent progress on the EU-US trade agreement reduces near-term tail risks, but trade policy uncertainty remains. EU lawmakers reached on May 20^th a provisional agreement to implement the transatlantic trade framework, paving the way for formal ratification ahead of the July 4^th deadline, eventually averting an immediate tariff hike. The most immediate concern had been autos, after President Trump threatened to raise tariffs on EU cars and trucks from 15% to 25% in response to perceived delays in Eu compliance. More broadly, uncertainty has not been fully resolved. While implementation moves forward, the framework remains conditional on final ratification and, crucially, on US compliance. Reflecting concerns about the reliability of US trade policy, the EU has insisted on safeguard mechanisms that allow it to suspend or withdraw concessions if Washington fails to uphold its commitments. This underscores that, despite recent progress, the agreement is best seen as reducing near-term risks rather than eliminating them. As a result, the outlook for the transatlantic trade policy will remain conditional on continuous political alignment and adherence to agreed terms, otherwise the risk of renewed trade frictions between the long-standing partners could re-emerge.