European Commission Sharply Downgrades Eurozone Growth Forecast Due to War
The European Commission lowered its eurozone GDP growth forecast for 2026 to 0.9% from 1.2%, while raising its inflation estimate to 3%. The May composite PMI for the region fell to its lowest since October 2023.
Europe in a Trap: Why 0.9% Growth Is Still an Optimistic Scenario
Author's Analytical Review
[The Core]: What Is Really Happening
The European Commission has lowered its eurozone GDP growth forecast to 0.9% — that's the official version. The reality is much darker. I work with data streams from logistics companies, production reports, and retail chains. And what I see makes me doubt: will there even be positive growth in 2026?
Notice the detail almost everyone missed. Dombrovskis said that "the situation should improve slightly in 2027 if tensions in energy markets ease." The key word is "if." European Commission officials don't use conditionals without reason. They have no confidence that the conflict in the Middle East will end in the foreseeable future.
But the main thing happening in reality is the coincidence of two processes: the energy shock from the Middle East and the structural weakening of European industry. The difference from 2022 (after the start of the special military operation) is that Europe now has no "safety cushion." In 2022, there were budget reserves, gas reserves, and room for monetary maneuver. Now, government debt is higher, interest rates are higher, and business confidence is lower.
And the most alarming thing — the labor market is starting to give way. Enterprises have been cutting staff for the fifth consecutive month, and the pace of layoffs is the highest since November 2020. In the services sector, jobs have been cut for the first time since early 2021. This is not just a "cooling off." This is the start of a recession masked by aggregate figures.
Timeline and Context
Let's correctly lay out the events of the last 10 days. This is important to understand how quickly the picture has changed.
May 14-15, 2026 — Christine Lagarde's speech. She acknowledged that the ECB Governing Council "discussed in detail and depth the possibility of a rate hike." But the bank left rates unchanged. Lagarde called the economy "resilient in a complex global environment." This was the last "calm" assessment.
May 20-21, 2026 — One of the most important days for the European economy this year. S&P Global publishes the composite PMI for May — 47.5 points. This is a drop from 48.8 in April. The market expected 48.8 — i.e., stabilization. It got a decline. This is the lowest reading since October 2023.
May 21, 2026 — The European Commission's Spring Economic Forecast. Dombrovskis announces a reduction in the growth forecast to 0.9% (from 1.2%) and an increase in the inflation forecast to 3.0% (from 1.9%).
May 22, 2026 — News of possible new US strikes on Iran. Oil prices above $100 per barrel. The energy shock deepens.
May 24-25, 2026 — I am writing this analysis. European markets closed down 0.5-1.0%.
What is important in this timeline: the European Commission's forecast was published a few hours after the PMI data. That is, the Commission already knew that the May PMI had failed when it revised the forecast. And still it left 0.9% for 2026.
Now look at what Chris Williamson from S&P Global says: "The survey data point to a possible contraction of the region's economy by 0.2% in the second quarter of this year." If this is true, then to achieve 0.9% for the full year, strong growth is needed in the second half. And given the energy crisis that is not easing, this is extremely unlikely.
Who Wins and Who Loses
Winner #1 — Energy-exporting countries. Dombrovskis directly said that rising energy prices "effectively redirect income from the EU economy to energy-exporting countries." These are Norway, the UAE, Qatar, the USA (LNG). Europe is paying them more and more money for the same amount of energy.
Winner #2 — The US dollar. In a flight to safety, investors move into the dollar. The EUR/USD pair is under pressure. Nordea strategists, however, see potential for euro strengthening due to policy divergence (ECB tightening, Fed not). But that's a medium-term view. In the coming weeks, the dollar will be stronger.
Loser — Germany. The growth forecast for Europe's largest economy is only 0.5% in 2026. This is a sharp drop from the previous forecast of 1%. German industry, oriented toward exports and cheap energy, is in crisis. Germany's PMI barely holds above 50, but only due to inventory accumulation, not real demand.
Non-obvious loser — France. France's PMI plunged from 47.6 to 43.5 — the lowest since 2020. 43.5 is a deep recession. French media are already warning that if the energy shock persists, growth in the second and third quarters could turn negative.
Those not named but in the game — European fertilizer and chemical producers. They suffer the most from high gas prices. Europe lost a significant part of this sector after 2022, and now the situation is repeating. BASF plants in Ludwigshafen are operating at 60-70% capacity. This is not temporary. This is deindustrialization.
What the Media Are Not Saying
Insight #1 — About the "stagflation" not openly discussed.
Lagarde in April dismissed the possibility of stagflation, calling comparisons with the 1970s inappropriate. But the data suggest otherwise. Eurozone inflation remains at 3%, and the PMI indicates economic contraction. The ECB is raising rates (the probability of a hike in June is very high — markets price in +0.25 pp), which will further slow growth. These are classic signs of stagflation: low growth, high inflation, tight monetary policy.
Why do officials avoid this term? Because acknowledging stagflation means admitting that standard tools (rate hikes) do not work. You cannot stimulate the economy when inflation is high. And you cannot fight inflation without killing growth. Europe is in a trap.
Insight #2 — About the hidden story with energy prices.
The European Commission forecasts that inflation in the EU energy sector will exceed 11% in the second quarter of 2026. This means household electricity and heating bills will rise more than 10% compared to last year. Meanwhile, real incomes are not growing. The gap between the cost of living and incomes will widen.
What does this mean for the economy? People will start saving on everything except food and housing. The services sector (restaurants, tourism, entertainment) will take another hit. The services PMI has already fallen to 46.4 — a 63-month low. And this is just the beginning.
Insight #3 — About the ECB's dilemma that no one can solve.
Look at the numbers. Inflation — 3% (above the 2% target). Growth — 0.9% (effectively stagnation). PMI — 47.5 (contraction). Labor market — layoffs rising. What should the ECB do?
- Raise rates → kills growth, worsens recession, increases unemployment.
- Cut rates → fuels inflation, weakens the euro, hurts energy importers.
- Hold rates → status quo, nothing improves.
ECB Governing Council members are divided. Pierre Wunsch (Belgian governor) said that "the probability of a hike is quite high" if the war does not end soon. ECB Vice President Luis de Guindos called for caution, pointing out that the effect on growth "will become much more noticeable in the coming weeks."
My opinion: The ECB will raise rates in June (probability 60-70%) because inflation is a more politically sensitive topic than growth. But this step will be a mistake. Europe will enter a recession by the end of 2026.
Forecast: Next 30 Days and 90 Days
Next 30 days:
- ECB meeting June 10-11, 2026 — rate hike of 0.25 pp with 60-70% probability. If this happens, European markets will fall 2-3% within 48 hours.
- June PMI data (release at end of June) — likely further decline to 46-47. Services sector will continue to fall.
- EUR/USD pair — will remain in the 1.04-1.07 range. On an ECB rate hike, short-term euro strengthening to 1.08-1.09, but quick return to 1.05-1.06 due to economic weakness.
- European stock indices (Euro Stoxx 50, DAX, CAC 40) — decline of 3-5% by end of June. Worst sectors: chemicals, automotive, consumer goods.
Next 90 days:
Baseline scenario (55% probability): ECB raises rates in June, then freezes them at 2.25-2.50%. European economy enters a technical recession (two quarters of negative growth) by end of 2026. Unemployment begins to rise from current historic lows. Inflation remains above 2.5% until year-end.
Scenario without a hike (25% probability): Middle East conflict quickly resolves, energy prices fall, inflation slows. ECB leaves rates unchanged. European economy avoids recession but stays at 0.5-0.7% growth in 2026.
Escalation scenario (20% probability): New strikes on Iran, blockade of the Strait of Hormuz, oil at $140-160 per barrel. Europe in deep recession. Eurozone GDP at minus 0.5% in 2026. ECB forced to sharply raise rates to 3.5-4.0% to combat inflation (which could reach 5-6%). This is the worst-case scenario.
Editorial Forecast
Asset: EUR/USD pair
Direction: Sideways with a downward bias over the next 24–72 hours
Key levels: resistance — 1.0750, support — 1.0450. Likely trading range — 1.0500-1.0650
Confidence level: medium (55%). The European Commission forecast and PMI data are already priced in, but the market continues to price in the probability of an ECB rate hike in June, which will support the euro in the short term
Main risk: Unexpectedly strong US retail sales data or hawkish Fed rhetoric will strengthen the dollar, and EUR/USD will break support at 1.0450, moving toward 1.0300
This forecast is the analytical opinion of the editorial board and does not constitute individual investment advice. Make decisions based on your own risk assessment and consultation with licensed financial advisors.
— Editorial Team
