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According to new International Monetary Fund (IMF) projections, Eurozone economic growth is expected to slow to 0.9% this year, down from a 1.1% forecast in April, before rising to 1.2% in 2027. The IMF links the downgrade to an energy price shock associated with the Middle East conflict, now in its fourth month, which it says will weigh on growth more than previously expected and push inflation higher.
The IMF projects Eurozone inflation at 2.8% this year, compared with a 2.6% forecast in April. It also estimates inflation is up 0.8 percentage points from the level before the US and Israel launched attacks on Iran in late February.
The IMF says that even if the energy price surge proves temporary, longer disruptions in energy markets could weaken consumer confidence and increase the risk of reduced spending. It also notes that the Hormuz Strait is nearly fully blocked for shipments of oil and gas from the Gulf, raising energy supply pressures. In addition, damages to production facilities could prolong shortages for several months.
The IMF warns that if the energy shock lasts longer than expected, inflation and inflation expectations could continue to rise. It also highlights that weakening confidence or financial stress could dampen demand.
The IMF points to challenges for the European Central Bank (ECB). On June 11, the ECB raised its policy rate to 2.25% to curb the economic impact of the crisis and control inflation. On the same day, the ECB cut its 2026 Eurozone growth forecast from 0.9% to 0.8% and lifted its inflation forecast to 3%, above the ECB’s 2% target.
The IMF emphasizes that the near-term priority is to keep inflation expectations stable and mitigate the energy shock within existing fiscal space, without increasing public spending too much, which it says could worsen the budget deficit. After the June 11 rate decision, the IMF still expects the ECB to continue lifting the policy rate by another 0.25 percentage points later this year.
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