The Middle East conflict has burdened European households and businesses with higher energy bills, slower growth, and inflation. The European Commission published its Spring 2026 Economic Forecast on Thursday, revising GDP growth for the EU down to 1.1 per cent for this year and pushing the inflation forecast a full percentage point higher than expected just six months ago. It is the second major energy shock to hit the bloc in less than five years, and the consequences will be felt well into 2027.
In February, the Commission expected steady growth and falling inflation. Then the Middle East conflict broke out. Within weeks, energy commodity prices surged and consumer confidence fell to a 40-month low. Fears of rising prices and job losses mounted fast. The Commission set out the damage in the Spring 2026 Economic Forecast, published on Thursday.
Higher energy bills hit households directly. Surging input costs squeeze business margins. The net effect is that income flows out of the EU economy and into energy-exporting countries. The Commission draws a direct parallel with 2022, when Russia cut gas supplies after its full-scale invasion of Ukraine. It calls the current shock the second of its kind in less than five years.
A slower, costlier year ahead
EU GDP growth reached 1.5 per cent in 2025. The Commission now projects 1.1 per cent for 2026, a downward revision of 0.3 percentage points from the autumn forecast. Growth should edge back up to 1.4 per cent in 2027, if energy market tensions ease. The euro area fares slightly worse. Its growth forecast stands at 0.9 per cent for this year, rising to 1.2 per cent in 2027.
Inflation tells a starker story. It fell steadily from its 2022 and 2023 peaks. Now the Commission sees it climbing back to 3.1 per cent across the EU in 2026, a full percentage point above its autumn projection. The eurozone, meanwhile, can expect 3 per cent inflation rate. Energy prices drive almost the entire rebound. Data from March and April already show a sharp acceleration.
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The labour market is also feeling the strain. Employment grew by 0.5 per cent in 2025, adding over 1 million jobs. This year, growth is expected to slow down to 0.3 per cent. More significantly, the long-running decline in unemployment is coming to an end. The rate should stabilise at around 6 per cent through 2027, as nominal wages chase higher prices.
Public finances face pressure from several directions at once. Governments must shield households and firms from rising energy costs. Subdued growth squeezes tax revenues. Defence spending adds further to the bill. The EU’s general government deficit is expected to grow from 3.1 per cent of GDP in 2025 to 3.6 per cent by 2027. The debt-to-GDP ratio will climb from 82.8 per cent to 85.3 per cent over the same period. By 2027, four member states will carry debt above 100 per cent of GDP.
A buffer, but not immunity
Compared to 2022, there is one important difference. Since Russia’s invasion of Ukraine, the EU has pushed hard on REPowerEU, its plan to reduce fossil fuel dependence. The bloc diversified its energy supply, accelerated decarbonisation, and cut energy intensity. Energy use per unit of economic output has fallen sharply. The Commission says these efforts are now cushioning the blow. The EU remains exposed, but less so than before.
The conflict in the Middle East has triggered a major energy shock, further testing Europe as it navigates an already volatile geopolitical and trade environment.
— Valdis Dombrovskis, Commissioner for Economy and Productivity; Implementation and Simplification
Commissioner Valdis Dombrovskis issued a clear message to member states. “The conflict in the Middle East has triggered a major energy shock, further testing Europe as it navigates an already volatile geopolitical and trade environment,” he said. He called on governments to keep fiscal support “temporary and targeted” and to accelerate structural reforms. He pointed to reduced fossil fuel dependency as proof that European resilience has already strengthened.
The Commission’s baseline expects energy prices to ease gradually. They should remain around 20 per cent above pre-war levels even by 2027.
The Commission also published a darker alternative scenario. Under it, prices stay elevated longer, inflation does not ease, and growth does not recover as projected. The Commission flags further risks: commodity shortages, softening labour demand, and global trade uncertainty. On the upside, faster structural reforms and strong public investment in defence and the energy transition could offset some of the weakness. The next update is the Autumn 2026 forecast, due in November.
