According to the European Commission, the conflict in the Middle East has reduced EU GDP growth by 0.3 percentage points in 2026, leading to higher business costs and an effective redirection of income from the EU economy to energy exporting countries. Business investments will be limited by tighter financing conditions, lower profits and increased uncertainty.
After reaching 1.5% in 2025, GDP growth in the EU is projected to slow to 1.1% in 2026, according to the European Commission's spring economic forecast for 2026. Weaker external demand is also putting pressure on export growth, Kallanish said.
"It was assumed that by the end of February 2026, the EU economy would continue to grow at a moderate pace along with a further decrease in inflation, but after the outbreak of the conflict, the prospects have changed significantly. Inflation began to rise a few weeks after the start of the conflict, caused by a sharp increase in energy prices, and economic activity is losing momentum," the Commission notes.
Overall inflation is currently expected to peak in 2026 and then decline in 2027 as energy prices are expected to decline gradually, although they will remain about 20% above pre-war levels.
"The main risk associated with this forecast is related to the duration of the conflict in the Middle East and its consequences for global energy markets. Given the unusually high degree of uncertainty and the narrowing of opportunities for rapid normalization of supply conditions, the baseline forecast is complemented by an alternative scenario involving longer interruptions," the Commission continues.
According to this scenario, inflation will not decrease and economic activity will not recover in 2027, as predicted in the baseline forecast. In addition, higher prices may encourage households and firms to reduce consumption and investment even more sharply.
The ongoing uncertainty regarding global trade policy and the ongoing reconfiguration of geopolitical and trade relations may further affect confidence and activity, the European Commission believes.
"Accelerating the implementation of structural reforms aimed at removing long-standing obstacles to EU economic growth remains an important risk factor for the outlook. Significant public investments in sectors such as defense and energy may partially offset the expected weakness of the private sector," the report says.
In 2025, the revival of housing construction began, which will last for several more quarters. However, the prospect of higher financing costs and commodity prices in the sector seems to justify a downward revision for 2026.,
