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EU Commission sees growth slowdown as energy shock drives up inflation
The impact of the energy shock is set to extend into 2027, with GDP growth picking up to a modest 1.4 per cent and inflation easing to 2.4 per cent—still some 0.3 pp higher than projected in autumn 2025.
The downward revision to growth in 2026 compared to autumn partly reflects slightly stronger-than-expected growth conditions at the beginning of 2026.
EU GDP growth is projected to slow down to 1.1 per cent this year, while inflation may rise to 3.1 per cent, the European Commission’s Spring 2026 Economic Forecast said.
The impact of the energy shock is set to extend into 2027.
The European Central Bank and most other EU central banks are expected to tighten their monetary policy stance or, at a minimum, delay previously anticipated easing measures.
Moreover, the inflation forecast for 2027 is influenced by the postponement of the roll-out of new EU Emissions Trading System, which, in the previous forecast round, was estimated to add 0.2 to 0.3 pp to inflation.
Futures energy prices point to a relatively swift, albeit partial, normalisation of supply conditions, with oil and gas prices expected to peak in the current quarter and decline to around 20 per cent above pre-war levels by end 2027.
Inflation data for March and April 2026 already point to a strong surge in energy prices. Energy inflation in the EU is expected to peak above 11 per cent in the second quarter (Q2) this year and remain above 10 per cent for the rest of the year, before declining in early 2027, and turning negative from Q2 2027.
In response to higher inflation, the European Central Bank (ECB) and most other EU central banks are expected to tighten their monetary policy stance or, at a minimum, delay previously anticipated easing measures.
Higher financing costs and weaker profits weigh on firms’ capacity to finance investment, while elevated uncertainty prompts many to postpone or scale back investment plans, a release from the commission said.
Despite a strong carryover from 2025, gross fixed capital formation is now expected to grow by only 2.2 per cent in 2026 and 2 per cent in 2027—a marked deceleration from the 2.8 per cent increase in 2025, and a downward revision compared to the Autumn 2025 Forecast.
With employment growth now projected to slow to 0.3 per cent in 2026 and 0.4 per cent in 2027, the unemployment rate is expected to stabilise at around 6 per cent. Nominal wages are set to decelerate less than previously expected in 2026, and remain sustained, growing by around 3.5 per cent in 2027, as they adjust with a lag to higher inflation.
Productivity growth is expected to slow to 0.7 per cent in 2026, as firms retain labour in a context of uncertain demand prospects, before recovering to 1 per cent in 2027.
EU merchandise balance is expected to decline to 1.2 per cent of GDP in 2026 and 1.1 per cent in 2027.
Overall, the current account surplus is projected to fall from 2.4 per cent of GDP in 2025 to 1.7 per cent in 2026 and 1.6 per cent in 2027.
The EU aggregate general government deficit is projected to gradually widen over the forecast horizon, rising from 3.1 per cent of GDP in 2025 to 3.6 per cent in 2027. This deterioration reflects a combination of subdued economic activity, higher interest expenditure, rising defence spending and new fiscal measures that aim to shield consumers and firms from high energy prices, the Commission said.
Risks to the outlook are primarily linked to the evolution of the conflict in the Middle East and its implications for global energy markets, it added.
Fibre2Fashion News Desk (DS)