Brussels has rung the alarm bell with a spring forecast “that projects weaker economic activity, as the conflict in the Middle East triggers a new energy shock that reignites inflation and shakes economic sentiment”.

The warning comes as the eurozone’s purchasing managers index (PMI), published by S&P Global, showed a contraction in activity with a reading of 47.5 – a 31-month low – down from 48.8 in April.

A PMI reading above 50 indicates growth while figures below 50 signals a economic contraction or recession. Other indicators point to a economic slowdown and increased fiscal costs for governments.

The Commission’s forecast notes that “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 conflict in the Middle East.

“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,” said the forecast.

After reaching a growth rate 1.5% in 2025, GDP across the the EU is now projected to slow down to 1.1% in 2026 – a downward revision of 0.3 percentage points from the the Commission’s autumn 2025 forecast of 1.4%.

“Growth projections for the euro area are similarly revised down, to 0.9% in 2026 and 1.2% in 2027, from 1.2% and 1.4% respectively,” said the Commission. “Inflation in the EU is expected to reach 3.1% in 2026 – a full percentage point higher than previously.”

The Commission’s pessimistic outlook assumes that, as a net energy importer, “the EU’s economy is highly susceptible to the energy shock caused by the conflict in the Middle East – the second such shock in less than five years.”

“The spike in energy prices means higher household bills and surging business costs that reduce profits for many industries, effectively redirecting income out of the EU economy and into energy-exporting countries,” said the forecast.

The conflict, triggered by US and Israeli strikes on Iran, plunged consumer confidence to a 40-month low “amid mounting fears of surging inflation and job losses”.

“Business investment is also set to be constrained by tighter financing conditions, lower profits and heightened uncertainty. Weaker external demand is also weighing on export growth,” said the Commission.

(jp)