Regional Economic Outlook

Europe is being hit by a new energy driven supply shock linked to the war in the Middle East, denting growth, lifting inflation, and heightening uncertainty across the region. Early signs point to weaker investment and consumption, and the outlook has deteriorated, with euro area growth projected at 1.1 percent in 2026 amid elevated risks. Policymakers face intense pressure to act quickly and visibly, but past crises show that broad, untargeted measures often bring short term relief at high fiscal costs.

The policy challenge is therefore to respond decisively without repeating costly mistakes. Anchoring inflation expectations, preserving financial stability, and keeping fiscal support targeted and temporary must go hand in hand with reforms that reduce energy vulnerability and raise productivity. Protecting the most exposed today while strengthening Europe’s capacity to absorb future shocks is not a trade off; it is the only credible path to more resilient growth and durable gains in living standards.