IMF Lowers Eurozone Growth Forecast for 2026 Amid Middle East Conflict

The International Monetary Fund (IMF) has downgraded its forecast for economic growth in the Eurozone for 2026, while increasing its inflation projections. The fund cautioned that the ongoing war in the Middle East and rising energy prices are exerting growing pressure on European economies.

In its periodic report on the economies of the twenty member countries of the Eurozone, the IMF revised the expected economic growth for 2026 down to 0.9%, compared to the earlier forecast of 1.1% published in April.

Conversely, the IMF raised its inflation forecast for the current year to 2.8%, up from the previous estimate of 2.6%. It attributed this increase to the energy shock resulting from the US-Israeli conflict with Iran, which has intensified price pressures.

The fund described the war involving Iran as a "large but temporary negative supply shock," noting that it has weakened consumer and business confidence and tightened financial conditions. This situation has coincided with higher energy prices and increased production costs.

The report highlighted that prolonged disruptions in energy supplies could push inflation to even higher levels. It also warned that rising inflation expectations among households and companies could complicate the task of monetary policymakers.

The IMF further cautioned that a resurgence of conflict in the Middle East, delays in energy infrastructure reforms, or an escalation of the war could exacerbate economic pressures on Europe in the near future.

Regarding monetary policy, the fund anticipated that the European Central Bank (ECB) will continue tightening after its recent decision to raise interest rates by 25 basis points. The IMF suggested that additional hikes totaling up to 50 basis points might occur in 2026, with a possible third increase if inflationary pressures persist.

The international financial institution indicated that interest rates may need to reach more restrictive levels to prevent the energy shock from triggering a broader wave of price increases across various economic sectors.

On the fiscal front, the IMF warned Eurozone governments against implementing broad-based support programs to offset rising energy costs. It argued that such measures could weaken incentives for consumption rationalization and increase fiscal pressures.

The report noted that, as of May 2026, European Union countries had enacted energy support measures averaging about 0.1% of GDP. It recommended that any future assistance be more precisely targeted toward the most affected households rather than providing comprehensive subsidies.

The IMF emphasized that the current priority is to maintain stable inflation expectations while continuing structural reforms aimed at enhancing energy security, boosting productivity, and strengthening the European economy's resilience to external shocks.

Additionally, the fund called for accelerating investments in renewable energy and reducing dependence on fossil fuels. It also advocated for greater integration of European markets and supply chains to support long-term economic growth and mitigate the impact of global energy market volatility.