Disappointing growth and strong inflation numbers for April hint at worse to come.
FRANKFURT — The eurozone economy eked out another quarter of growth at the start of the year — but the outlook is darkening fast.
Output rose 0.1 percent during the first three months of 2026, slowing from a rate of 0.2 percent at the end of last year, according to preliminary Eurostat data released Thursday. Compared with the same quarter of 2025, seasonally-adjusted gross domestic product increased by 0.8 percent.
That was weaker than the 0.2 percent expected, and the figures hint at the sharp drop in confidence among business and households across the region since the U.S. and Israel attacked Iran at the start of March.
The number incorporated weaker than expected figures from France, where GDP was flat from the fourth quarter. But the region’s largest economy Germany performed better than feared, growing 0.3 percent, while growth in Italy and Spain slowed by less than forecast.
The war — and the resulting surge in oil and gas prices — has sharply changed the economy’s trajectory. The German government has halved its growth forecast for this year to only 0.5 percent. The International Monetary Fund earlier this month downgraded its 2026 growth forecast for the eurozone to 1.1 percent, from a prior estimate of 1.3 percent. It warned that rising prices and weaker activity are pushing the region toward a more stagflationary environment.
Inflation, by contrast, is on the way up, due to the surge in energy costs. The headline inflation rate jumped to 3.0 percent in April, Eurostat said in a separate release. Core inflation, which strips out volatile oil and food prices and is seen as a bellwether for underlying trends, eased to 2.1 percent from 2.2 previously, but prices still rose a notable 0.9 percent from March.
Striking the right balance
Economists warn that it will take months for the full impact of the war to be felt, and survey data also suggest that things will get worse before they get better.
S&P Global’s composite purchasing managers index for the eurozone, a rough proxy for private-sector activity, slipped back into contraction territory in April after 15 months of growth, while the prices paid and charged by industry both surged. Consumer surveys from the European Central Bank and European Commission also show inflation expectations jumping sharply.
Much will depend on monetary policy striking the right balance. The ECB is walking a tightrope — trying to contain inflation without tipping the economy into a deeper slowdown by raising borrowing costs.
The ECB’s quarterly survey of bank lending, released this week, showed that lenders are already turning more cautious about extending new business, raising their own lending rates and tightening loan conditions. As such, some policymakers have suggested that the ECB doesn’t need to make life any more difficult in the near term.
While the central bank is expected to keep policy unchanged at its meeting later today, markets currently price in a hike as soon as June, with two more by year-end.
Some economists fear that the ECB is at risk of overreacting to a supply shock it cannot redress, prompted by memories of having raised rates too slowly in 2022, when Russia’s invasion of Ukraine created the last energy price shock. That morphed into the worst wave of inflation in nearly 50 years, peaking at over 10 percent.
“I think the ECB is about to make a mistake in 2026 to make up for the mistake that was done in 2022,” warned Jean-François Robin, global head of research with Natixis in Paris. He warned that the starting point today is very different, with growth already sluggish and unemployment rising in all of the region’s three biggest economies.