Eurozone: Energy shock reshapes inflation and growth path – Rabobank

Rabobank’s RaboResearch team assesses how the Middle East conflict and higher Oil and European gas prices will affect the Eurozone economy. Their new baseline sees Eurozone inflation in 2026 about 0.5 percentage points higher and growth 0.1 percentage points lower than pre-conflict projections, with risks skewed to more persistent inflation and weaker activity under severe disruption scenarios.

Higher energy costs hit inflation and GDP

"According to our calculations, Eurozone HICP inflation will rise to an average of 2.4% in 2026, before easing back to 1.9% in 2027 in our new baseline. This means inflation in 2026 is about 0.5 percentage points higher than in our pre-conflict baseline, illustrating how strongly geopolitical developments can influence domestic price pressures."

"In the new baseline scenario, economic growth is 0.1 percentage points lower than in the pre-escalation baseline, and each escalation scenario reduces growth by an additional tenth."

"In the most disruptive scenario – where critical energy infrastructure is out of operation for an extended period – we see inflation rise to over 5%, with a peak over 6% late 2026."

"Only in Scenario 3 – i.e. the destruction of critical energy infrastructure – do we see economic growth fall 0.7 percentage points, significantly more than in the other scenarios."

"Altogether, this means that among the four largest member states, we project Germany and Italy to be hit somewhat more by the current developments in the Middle East than France and Spain."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)