Eurozone: Stagflation risk builds after Iran conflict – Rabobank

Rabobank strategists argue that the Iran war delivers a stagflationary shock to the Eurozone, lifting inflation and depressing Gross Domestic Product (GDP). They expect Eurozone inflation to stay above pre-war projections through 2027 and see growth slowing sharply in 2026, with only a modest recovery in 2027 despite government support.

War shock lifts prices and hits growth

"As a net energy importer, the Eurozone is highly exposed to rising energy prices. Higher prices deteriorate the bloc’s terms of trade and weigh on consumption and investment by eroding real incomes, squeezing margins, and dampening confidence. Together with support measures, this puts pressure on public finances."

"Higher risk and inflation premia, and expectations of policy rate hikes, lift long-term interest rates, further restraining investment. We currently assume one rate hike this year; the market prices two. The 10-year EUR swap rate has risen by about 30 basis points since end-February."

"Based on our current energy price forecasts, we expect Eurozone inflation to average 3.1% in 2026 before easing to 2.5% in 2027, still above pre-war projections. Cumulative inflation over these two years would be 1.7 percentage points higher than we forecasted previously. Growth is projected to slow from 1.5% in 2025 to 0.6% this year, followed by a modest rebound to 0.9% next year."

"The window for a milder scenario –in which the Strait opens and energy flows resume faster– is essentially closed, while the risk of a more severe scenario is still very much present. If the situation in the Gulf region worsens or persists for longer, the risk of ‘non-linear’ effects increases. That includes severe demand destruction, de-industrialization, and widening credit and sovereign risk premiums."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)