Eurozone Faces Weak Growth, Rate Hikes as Inflation Accelerates Amid Energy Shock
European economies are slowing significantly due to energy price shocks from the Middle East conflict, prompting the ECB and other central banks to signal potential rate hikes. Real GDP growth in the eurozone was just 0.1% in Q1, while headline inflation jumped to 3%.
Europe's Growth Stalls
Europe now expects real GDP contractions, albeit short-lived and modest in scale, in many of Europe's largest economies, including Germany, France, Italy and the UK. Real gross domestic product was up just 0.1% in the Eurozone between the fourth quarter of 2025 and the first quarter of 2026, indicating weakness.
Inflation and Monetary Policy
Headline inflation surged to 3% in April from 2.6% in March, driven by energy costs. Key changes to forecasts in May include adding additional rate hikes in Western Europe this year, led by the European Central Bank, contributing to projected quarter-over-quarter real GDP contractions in many of the region's largest economies.
Policy Response
The European Central Bank chose to leave its benchmark interest rate unchanged but adopted a wait-and-see approach to monetary policy amid the conflicting pressures of weak growth and rising inflation.