The Middle East conflict has knocked off 0.3 percentage points from the EU’s GDP growth in 2026, lifting business costs and effectively redirecting income out of the EU economy and into energy-exporting countries, the European Commission says. Business investment is set to be constrained by tighter financing conditions, lower profits and heightened uncertainty.
After reaching 1.5% in 2025, GDP growth in the EU is now projected to slow down to 1.1% in 2026, the Commission says in its Spring 2026 Economic Forecast. Weaker external demand is also weighing on export growth, Kallanish notes.
“Before the end of February 2026, the EU economy was set to keep expanding at a moderate pace alongside a further decline in inflation, but the outlook has changed substantially since the outbreak of the conflict. Inflation started picking up a few weeks after the outbreak of the conflict, driven by the sharp increase in energy commodity prices, and economic activity is losing momentum,” the Commission observes.
Headline inflation is now set to peak in 2026 before easing in 2027, as energy commodity prices are expected to gradually decline, albeit remaining around 20% above pre-war levels.
“The major risk surrounding the forecast concerns the duration of the conflict in the Middle East and its implications for global energy markets. Given the unusually high degree of uncertainty – and the narrowing window for a rapid normalisation of supply conditions – the baseline forecast is complemented by an alternative scenario assuming more prolonged disruptions,” the Commission continues.
Under this scenario, inflation would not ease and economic activity would fail to rebound in 2027 as projected in the baseline forecast. In addition, higher prices could prompt households and firms to scale back consumption and investment more sharply.
Continued uncertainty surrounding global trade policies and the ongoing reconfiguration of geopolitical and trade relationships could further weigh on confidence and activity, the Commission says.
“Faster implementation of structural reforms addressing long-standing bottlenecks to EU growth remains an important upside risk to the outlook. Strong public investment in sectors such as defence and the energy transition may offset some of the weakness expected in the private sector,” it adds.
Residential construction started a rebound in 2025, which is set to carry on for a few quarters. However, the prospect of higher financing costs and input prices in the sector seem to justify a downward revision for 2026, the Commission concludes.
