High energy prices caused by the US-Israel war on Iran will rein in EU economic growth this year and bring a slide in the jobless rate, the European Commission said in a new forecast on Thursday.
It expects gross domestic product to grow 1.1% this year but perform more strongly next year, based on an assumption that the conflict will end, restoring oil and gas supplies. But a longer energy price shock could cancel an expected rebound in 2027.
Uncertainty over how long the conflict will last is weighing on Europeans. Consumer confidence fell in April to its lowest level in 40 months as people worried about rising inflation and job losses. They are spending less, and plans for big purchases have plunged, the Commission said.
Companies are also likely to scale down investments this year, particularly in equipment, as they expect higher borrowing costs and lower revenues.
The Commission already sees an effect on the jobs market, where unemployment is at a record low. It sees fewer job vacancies and a slowdown in hiring, describing this as a potential “prelude to a sharper downturn in employment growth.”
Inflation – a measure of how quickly prices are rising – reached its highest level last month since 2022. Rising energy prices are expected to hit agriculture, distribution, and transport first before rippling through other parts of the economy. Central and Eastern Europe are expected to be more severely affected because households there spend a larger share of their budgets on energy.
All of this will put governments under pressure. Many have already racked up large debts during the Covid crisis. They now risk increasing debt further and running larger deficits – when their spending exceeds their income – as they try to deal with the disruption caused by the blockade in the Strait of Hormuz.
13 of the EU's 27 member states, including France and Poland, are expected to exceed the bloc's 3% budget deficit limit. That threshold is particularly important for eurozone countries, which are asked to keep their budgets under control to protect the stability of the shared currency.
The EU's economy commissioner, Valdis Dombrovskis, tried to highlight some more hopeful developments, but the outlook remains mixed. New trade deals, such as Mercosur, might open up new opportunities. Public spending on defence and the energy transition may partly offset a worsening business climate. AI is an opportunity if it helps companies save or make money, but a risk if it leads to job losses.
Dombrovskis said that EU efforts to remove barriers preventing companies from trading more within the bloc, if successful, would support growth. “A just and lasting resolution” of Russia's war on Ukraine would also be “a clear net positive,” he added.