European economies on alert for stagflation despite Middle East truce

European Union countries could face a “stagflationary shock” despite the US-Iran truce, EU economy commissioner Valdis Dombrovskis told the Financial Times.

He explained that the current situation combines high inflation with low GDP growth and unemployment, forcing a downward revision of the EU’s economic growth forecast. 

“It’s certainly a welcome step towards de-escalation and is also expected to bring relief as regards the energy crisis,” Dombrovskis said. He added that while the truce may ease the energy crisis, the global economic consequences of the war remain highly tense and uncertain.

The updated EU growth forecast will be released in May. Before the US and Israeli operation against Iran, the European Commission expected GDP growth of 1.4% and inflation around 2%. 

According to the latest estimates, if energy prices return to pre-war levels by the end of 2026, GDP growth would drop by a maximum of 0.4 percentage points, and inflation would reach around 3%. If high oil and gas prices persist longer, the bloc’s economic growth would not exceed 0.8%, with inflation rising to 4.5%.

By Jeyhun Aghazada