Key Points:
- The European Commission lowered its economic growth projection for the European Union to 1.1 percent this year, down from 1.4 percent.
- Surging energy prices resulting from the closure of the Strait of Hormuz are pushing inflation projections up to 3.1 percent.
- Valdis Dombrovskis warned that a prolonged conflict could halve the current economic growth estimates.
- Average government deficits across the bloc are expected to rise to 3.6 percent of GDP by 2027.
The European Commission slashed its economic growth forecasts for the European Union on Thursday as surging energy prices drag down the continent’s economy. The ongoing war in the Middle East has disrupted critical shipping routes, prompting the EU’s executive branch to downgrade its growth estimate from 1.4 percent to 1.1 percent for this year.
This revision represents a severe setback, but EU officials warn that the situation could deteriorate further. Valdis Dombrovskis, the EU’s economy commissioner, told reporters on Thursday that economic growth might fall by half if the conflict continues longer than policymakers currently expect. High energy costs continue to put immense pressure on European businesses and households.
The energy shock is also driving up living costs across the 27-nation bloc. Rising energy prices will push inflation to 3.1 percent, representing a full percentage-point increase compared to the Commission’s previous autumn forecast. This inflation spike complicates the European Central Bank’s work, which had hoped to lower interest rates to stimulate business activity.
European households and businesses will likely feel the effects of this energy disruption well into the future. The European Commission estimates that the economic drag will extend into 2027, projecting growth of a modest 1.4 percent next year. Dombrovskis emphasized that the ongoing war in the Middle East has created an undeniable drag on the regional economy, halting the recovery that many had hoped to see this year.
The slowdown has hit Europe’s three largest economies particularly hard. Germany, France, and Italy are all set to post growth rates significantly below the EU average this year. The Commission expects the German economy to grow by just 0.6 percent. In comparison, France and Italy will likely expand by a weak 0.8 percent and 0.5 percent, respectively, stalling the bloc’s primary economic engines.
Much of the current crisis stems from the closure of the Strait of Hormuz, a narrow waterway that handles roughly 20 percent of global oil traffic. The blockade has starved the European market of vital fuel supplies, forcing manufacturers to pay premium rates for alternative energy sources. Recent diplomatic efforts between the United States and Iran to resolve the conflict have hit a complete standstill, leaving markets highly volatile.
As tax revenues fall and governments step in to subsidize energy bills, public finances are deteriorating. The Commission expects average government deficits in Europe to rise from 3.1 percent of gross domestic product in 2025 to 3.6 percent in 2027. This fiscal strain limits European governments’ ability to invest in long-term infrastructure and public services.
Germany faces a particularly acute fiscal crisis under these new projections. The Commission expects Germany’s budget deficit to reach 3.7 percent of GDP in 2026, significantly exceeding the EU’s established three percent limit. This overspending could trigger the EU’s excessive deficit procedure, a special regulatory regime that forces governments to implement strict austerity measures to restore fiscal discipline.
The grim forecast aligns with fresh private sector data released on Thursday morning. A eurozone-wide purchasing managers’ survey revealed that private sector activity contracted in May at the fastest pace in over two and a half years. Businesses are cutting back on production and hiring as they struggle to cope with rising operating costs and weakening consumer demand.
The business outlook is especially bleak in France, where commercial activity shrank at the fastest pace in over five years. This marked the fifth consecutive month of contraction and defied analyst expectations for a mild economic improvement. The prolonged downturn in France raises serious questions about the country’s ability to avoid a broader recession as energy pressures persist.
