EU Economic Forecast: energy sector Europe’s biggest structural weakness

The European economy is once again facing a familiar problem: rising energy prices, slowing growth and renewed fears over inflation. In its Spring 2026 Economic Forecast, the European Commission’s spring report warned that the conflict in the Middle East has triggered a new energy shock that is weighing heavily on households, businesses and governments across the European Union.

After months of cautious optimism about falling inflation and a gradual recovery, Brussels now expects economic growth to weaken sharply in 2026 while consumer prices rise again. The combination raises the spectre of stagflation: the difficult economic scenario in which weak growth and high inflation occur at the same time.

According to the latest commission report, the EU’s GDP growth is expected to slow to 1.1% in 2026, down from 1.5% in 2025. In the euro area, growth is forecast at just 0.9%, reflecting weaker industrial activity, declining business confidence and higher production costs linked to energy markets. Inflation, meanwhile, is expected to reach 3.1% in the whole EU and 3.0% in the eurozone, a figure that significantly surpasses the European Central Bank’s 2% target.

The Middle East crisis and the return of the energy shock

The main driver of this slowdown is the rise in oil and gas prices following instability in the Middle East and disruption around the Strait of Hormuz, one of the world’s most important energy transit routes. The upwards spiral of energy costs has fed directly into transport, food and manufacturing prices across Europe.

Although the 2022 invasion of Ukraine taught the EU a lesson on crisis preparedness, especially on the continent’s inherent energy vulnerability, the latest developments demonstrate that the whole of the continent – not only the 27 EU member states – remain highly exposed to fluctuations in global energy markets.

The Commission argues that the bloc is now better prepared than it was in 2022 thanks to investments in renewable energy, diversified gas imports and reduced dependence on Russian fossil fuels. However, energy remains one of the biggest structural weaknesses for the European economy, and although the increase in inflation has been weaker than in 2022, the figures are still cause for concern.

Households and businesses under pressure.

For Europeans, the consequences are already becoming visible. Higher fuel prices are increasing transport costs, household energy bills remain elevated, and supermarket prices are once again under pressure. Consumer confidence has fallen sharply as many families worry about purchasing power.

Businesses are also facing growing difficulties. Energy intensive sectors such as manufacturing, chemicals and transport are seeing operating costs rise just as global demand weakens. Many companies are delaying investment decisions because borrowing costs remain high and the economic outlook is uncertain. This creates a difficult dilemma for the European Central Bank. Inflation remains above target, meaning interest rates may need to stay high for longer. At the same time, tighter monetary policy risks slowing the economy even further.

Fiscal concerns return

The slowdown is also reviving concerns about public finances in several European countries, particularly those with high public debt levels. Italy, Greece, France and Belgium are among the economies considered most vulnerable to the new environment, which is making borrowing increasingly more costly.

With weak growth reducing tax revenues and higher interest rates increasing borrowing costs, European capitals are facing mounting pressure to balance fiscal discipline with demands for economic support measures. The European Commission has urged governments to avoid broad subsidies and instead focus on targeted aid for vulnerable households and businesses, in order to avoid compounding the persistent inflation problem.

Some analysts warn that Italy could become the eurozone’s most indebted major economy in the coming years if growth remains weak. This would complicate the government’s efforts to stimulate the economy while respecting EU fiscal rules.

Spain continues to outperform

Not all European economies are slowing at the same pace. Certain countries, and particularly Spain with its 2.9% GDP growth in 2025, continue to outperform many European neighbours thanks to strong domestic demand, tourism revenues and investment flows.

The European Commission even slightly upgraded Spain’s growth forecast for 2026, making it one of the few major EU economies to avoid significant downward revisions. The Spanish economy has benefited from a stronger labour market, with falling unemployment, and sustained recovery in services, particularly tourism. This contrast highlights the increasingly uneven nature of Europe’s economic performance, with southern European economies no longer necessarily lagging behind the industrial core of the European continent.

An uncertain outlook for 2027

Looking towards the future, much depends on developments in energy markets and geopolitics. Brussels expects inflation to ease gradually in 2027, falling to around 2.4%, while growth could recover modestly to 1.4%.

However, the Commission also warned that a prolonged conflict in the Middle East or further disruptions to global energy supplies could produce a much worse outcome, including persistently high inflation and even lower growth.

For Europe, the message of the Spring 2026 forecast is clear: despite progress since the 2022 energy crisis, the continent remains vulnerable to external shocks. Policymakers now face the difficult task of balancing inflation control, economic growth and social stability at a time of increasing geopolitical uncertainty.