The war in Iran is dragging Europe into a new economic squeeze, pushing prices higher just as growth weakens across the continent and raising fresh fears of stagflation in the continent, according to a new report.
Reuters detailed on Thursday found that the conflict is worsening Europe’s energy shock, hitting businesses, consumers, and policymakers at the same time. Europe’s private sector contracted for a second consecutive month, with S&P Global’s Composite PMI falling to 47.5, a reading that signals shrinking activity. Germany and France, Europe’s two largest economies, both showed signs of strain as energy costs and uncertainty weighed on demand levels.
The pressure is coming largely from the energy sector. The war has disrupted shipping through the Strait of Hormuz, a critical route for global oil and liquefied natural gas, sending oil above $100 a barrel and raising costs for European manufacturers, transport companies, and households.
That leaves Europe facing a scenario of slower growth and elevated inflation. The European Central Bank is expected to raise interest rates in June to contain price pressures, Reuters reported, but weakening activity could make further hikes harder to justify.
The labor market is also showing cracks. Eurozone companies are cutting jobs at the fastest pace since late 2020, another sign that firms are responding to higher costs by pulling back.
The European Commission also cut its outlook, forecasting euro area growth of just 0.9% in 2026, down from 1.4% in 2025. Inflation, meanwhile, is now expected to reach 3.0% in the euro area this year. The ECB had already warned in March that energy prices tied to the war in the Middle East would push inflation higher. ECB staff projected euro area inflation at 2.6% in 2026, citing the global effects of the war on commodity markets, real incomes, and confidence.
The International Energy Agency said disruptions to seaborne trade through the Strait of Hormuz helped drive a sharp drawdown in global inventories in March and April. Its May oil market report said on-land stocks fell by 170 million barrels in April, including a 146 million-barrel drop in OECD countries.
The International Monetary Fund said in its April World Economic Outlook that the war in the Middle East had disrupted the global economy. The IMF projected global growth of 3.1% in 2026 under a limited-conflict assumption, below recent performance and pre-pandemic averages. In a worst-case scenario, a prolonged conflict could push oil to $180 a barrel and derail recovery into 2027.
Europe is not as vulnerable as it was after Russia’s 2022 invasion of Ukraine, when the region scrambled to replace Russian gas. Diversification and decarbonization have helped, but the latest shock arrives before households and companies have fully recovered from years of inflation, high borrowing costs, and weak industrial demand.
