The Conference Board Economic Forecast for the Euro Area Economy

Euro Area’s growth improved into year-end, but the latest escalation in the Middle East amplifies uncertainty and clouds the outlook. Before the US-Israel strikes on Iran on February 28^th, the Euro Area (EA) economy was on a gradually improving trajectory. Second-round estimates confirm the bloc grew in Q4 by 0.3% quarter-on-quarter (q/q), with Germany and Italy expanding by 0.3% and Spain by a robust 0.8%, while France was revised slightly upwards to 0.2%. Forward-looking indicators also pointed to momentum carrying into early 2026. The EA S&P Global’ s Purchasing Managers’ Index (PMI) improved in February to 51.9, marginally above January’s reading, with services leading the expansion and manufacturing sentiment turning positive for the first time since 2022. Consumer confidence held near a one-year high in February and was slightly less negative than in 2025 (-12.2 versus a 2025 average of -13.4), European Commission data show, suggesting consumption could continue to support activity in the first half of the year.

However, the renewed geopolitical tensions in the Middle East now introduce a clear downside risk for the bloc’s growth outlook. As the conflict’s economic implications unfold, and Europe continues to be exposed owing to fresh energy supply and price disruptions, high-frequency data must be interpreted cautiously. As of March 9^th, oil and gas prices have already climbed to year-highs. Brent crude oil now trades near $100/barrel and Dutch TTF front-month gas is steadily above €50/MWh, 40% and 75% higher than on February 26. For an energy-importing region like Europe, a sustained increase in energy prices would hit growth through two main channels. First, higher input costs would put greater pressure on an already strained manufacturing sector that already deals with uncompetitive energy prices, high labor costs and lower export competitiveness. Second, broader uncertainty, volatility and higher inflation would deteriorate further business and consumer confidence prompting businesses to scale back investments and consumers to spend less. Both would put additional pressure on an early-stage, and still fragile, recovery in domestic demand. Against this backdrop, we leave our baseline forecasts unchanged for now, but the balance of risks has shifted materially to the downside. The likelihood of downgrading our outlook in coming months has increased, but the adjustment will depend on the severity and duration of the shock, and on broader spillovers.. For now, we still expect the EA economy to grow by 1.3% in 2026, and a notch higher in 2027, at 1.4%.

Inflation returns closer to 2%, but the war raises upside risks. Annual headline inflation in the EA ticked up to 1.9% y/y in February from 1.7% in January, bringing it near the ECB’s 2% medium-term target. Most major components of the inflation basket saw modest increases. Prices of non-energy industrial goods rose to 0.6% y/y, while services inflation accelerated to 3.4%, up from 3.2% a month earlier. Energy inflation remained negative, easing from -3.9% to -3.0%, while food inflation edged down from 2.7% to 2.6%. Core inflation, which strips out the more volatile items of food and energy, rose from 2.2% to 2.4%, indicating that underlying price pressures in the EA have not fully receded. Across countries, France stood out, with annual HICP climbing from a five-year low of 0.3% in January to 1.1% in February, driven by a sharp rise in energy prices. Until now, disinflation has been supported by falling goods prices, favorable energy base effects, and a stronger euro. However, a prolonged conflict in the Middle East could reverse part of this progress, especially if disruptions lift oil and gas prices higher for longer. This would increase the risk of inflation moving above 2% and could complicate the ECB’s decision-making. While we keep our inflation forecasts unchanged for now, still expecting headline annual inflation to average around 1.8% in 2026, we underline that risks to the inflation outlook have clearly shifted to the upside.

A shift in the ECB’s narrative appears now more likely. In our update last month, we highlighted how the European Central Bank (ECB) maintained a clear narrative on the policy outlook. The Euro Area economy had shown remarkable resilience despite a geopolitically turbulent 2025, risks appeared broadly balanced, and inflation was hovering near target. A stronger euro, and associated disinflationary pressures, had even increased the likelihood of a rate cut in 2026, provided the appreciation persisted or weighed on growth and inflation. This narrative is now likely to change. Policymakers reconvene on March 17-18, but heightened prospects of a renewed supply-side shock stemming from the conflict in the Middle East could shift the debate from policy stagnation to a more restrictive stance, particularly if energy-driven inflation risks intensify. Similarly to our take regarding the growth and inflation outlook, it’s still too soon to adjust our monetary policy forecasts. However, the ECB keeping its main rate at 2% for the remainder of the year now appears less plausible than a month ago.

Unemployment rate reaches a new record low in February. In January, the jobless rate in the common currency bloc fell to 6.1%, with the number of unemployed falling by 184 thousand compared to December. Among the EA’s largest economies, unemployment stood at 7.7% in France. In Germany, harmonized unemployment held steady at 4%, but the rate continues on an upward trajectory amid continued weaknesses in industry, with manufacturing employment having fallen by more than 243 thousand between Q2 2023 and Q4 2025, a 4.3% decline. In Italy and Spain, unemployment fell to 5.1% and 9.8%, respectively, at their lowest levels recorded since the onset of the global financial crisis. Overall, the EA’s labor market continues to be a stronghold for the economy, but rising geopolitical risks and elevated uncertainty could test this strength over the coming quarters.

Looking ahead, a prolonged or broader war in the Middle East is currently the single most important downside risk to the EA outlook. Though Europe has no direct trade with Iran, the region remains pivotal for global oil and LNG flows, meaning even the risk of disruption can lift prices materially. The Strait of Hormuz, through which roughly 20% of global crude oil and volumes of LNG transit, is a critical energy chokepoint. Any impairment to shipping or to Gulf supply (most notably, Qatar LNG), would tighten global markets and raise Europe’s import bill through higher spot prices and stronger global competition for energy supply. For an energy-intensive region, sustained increases in oil and gas prices would transmit quickly into the economy by lifting consumer prices and raising input costs, with disanalogous pressure on energy-intensive industries and manufacturing-heavy economies like Germany and Italy. Early estimates by The Conference Board suggest that oil prices sustained above $100/barrel throughout 2026 could reduce EA growth by roughly 0.1 percentage points (pp) to 0.3pp while raising inflation by a similar magnitude, depending on the duration and severity of the shock. Natural gas prices pose an even greater risk for Europe, given gas often sets the marginal price in electricity markets, and higher utility prices would amplify the drag on real incomes and business costs beyond our oil-only scenario. Overall, among the advanced economies not directly involved in the conflict, Europe is one of the most exposed given its high import dependence, the sensitivity of industrial activity to energy costs, and the speed at which global price shocks pass through to domestic inflation and broader confidence.