Euro zone economic growth faces its stiffest test in years as surging energy prices from the Middle East conflict threaten to tip the region into stagflation, Barclays warned in a recent note.

Oil prices have risen 29% and gas prices 67% since Feb. 26, according to Barclays. If sustained, those moves would shave 0.4 percentage points off euro zone growth over the next year and add up to 1.2 percentage points to consumer prices, based on European Central Bank sensitivity estimates cited by Barclays.

The ECB’s deposit rate sits at 2%, and Barclays expects it to stay there. “Very unlikely the ECB will change policy rates rates at the next meeting,” ECB Governing Council member José Luis Escrivá said Thursday, stressing the bank should “avoid reacting to short-lived inflation moves.”

The warning comes as the euro zone was already showing uneven momentum. Real GDP grew just 0.2% quarter-on-quarter in Q4 2025, revised down from an earlier 0.3% estimate after Ireland posted a sharp 3.8% quarterly contraction.

Excluding Ireland, growth held at 0.4%, driven by private consumption, which rose 0.4% in Q4, and investment, which expanded 0.6%, according to Barclays citing Eurostat data.

Inflation complicated the picture further. Euro zone headline HICP rose to 1.9% year-on-year in February from 1.7% in January, while core inflation climbed to 2.4% from 2.2%, driven by firmer core goods and services prices, Barclays noted.

On wages, compensation per employee decelerated to 3.7% year-on-year in Q4, 0.2 percentage points below ECB projections.

Negotiated wages rose 3%, but with labour productivity growth slowing to 0.6%, unit labour costs eased only marginally to 3.1%.

Unit profits accelerated to 2.0%, nudging the GDP deflator up 0.1 percentage points to 2.5%, according to Barclays.

Forward-looking indicators pointed to continued but softer expansion. The February composite PMI held at 51.9, with manufacturing improving to 51.9 from 50.5 in January and services steady at 51.9.

Germany stood out at 53.2, while France remained just below the 50 no-growth threshold at 49.9, Barclays said citing Haver Analytics.

Barclays projected quarterly GDP growth of 0.3% in the first half of 2026 and 0.35% in the second half, conditional on the energy shock proving short-lived.
The euro zone unemployment rate fell to 6.1% in January from 6.3% in December, signalling a still-resilient labour market, the bank noted.

Governments may blunt some of the energy impact. Italy, France, Belgium and Spain were in discussions with energy producers on excise and tax changes, Barclays said, though it cautioned any fiscal response would be more targeted than the sweeping measures deployed during the 2021–23 energy crisis given tighter budget constraints.

France’s government deficit stood at 5.4% of GDP in 2025 with debt at 116.4% of GDP, versus Germany’s deficit of 2.7% and debt at 63.0%, according to Barclays forecasts.

Source: Investing.com