ECB forecasters slash growth and raise inflation outlook as energy shock bites

ECB professional forecasters have raised eurozone inflation expectations to 2.7% for 2026 while cutting growth forecasts to 1.0%, with energy costs from the Middle East war cited as the primary driver.

Summary:

• The ECB’s Survey of Professional Forecasters for Q2 2026 showed headline inflation expectations revised sharply upward to 2.7% for 2026, up from a previous expectation of 1.8%, before easing to 2.1% in 2027 and 2.0% in 2028, per the ECB
• Core inflation, excluding energy and food, was also revised upward by 0.2 percentage points for 2026 and 2027 to 2.2%, and by 0.1 percentage points for 2028 to 2.1%, according to the ECB survey
• Real GDP growth expectations were cut to 1.0% for 2026 and 1.3% for 2027, representing downward revisions of 0.2 and 0.1 percentage points respectively, with the ECB attributing the cuts primarily to the drag from higher energy prices related to the Middle East conflict
• Longer-term inflation expectations for 2030 remained anchored at 2.0%, and unemployment forecasts were unchanged at 6.3% for 2026, easing to 6.2% in 2027 and 6.1% in 2028, per the ECB
• Slovak ECB policymaker Peter Kazimir said the inflation outlook remains tilted to the upside and described a June rate hike as virtually certain, citing spreading energy costs and no improvement in the Iran war situation, according to reports
• Bank of France Governor Francois Villeroy de Galhau urged a cautious, data-driven approach, saying the ECB needs a critical mass of evidence on core inflation, wages and expectations before committing to rate hikes, per his remarks

The European Central Bank’s latest survey of professional forecasters has delivered a stark assessment of the eurozone’s near-term outlook, combining a sharp upward revision to inflation expectations with a meaningful downgrade to growth, as the economic fallout from the Middle East conflict continues to spread through energy markets and into the broader economy.

Headline inflation across the eurozone is now expected to reach 2.7% in 2026, a revision of almost a full percentage point from the previous survey’s projection of 1.8%. The ECB attributed the bulk of that revision directly to higher energy prices stemming from the war in the Middle East. Inflation is then projected to ease to 2.1% in 2027 and return to the ECB’s 2% target in 2028, with longer-term expectations for 2030 holding steady at 2.0%, a signal that forecasters still regard the current inflation surge as ultimately transitory rather than structural.

Core inflation, which strips out the volatile energy and food components and is closely watched as a measure of underlying price pressure, was also revised upward. Forecasters now see core inflation at 2.2% for both 2026 and 2027, up by 0.2 percentage points from the previous round, and at 2.1% for 2028, up by 0.1 percentage points. While the revisions are modest in absolute terms, the direction matters: core measures moving higher alongside energy-driven headline inflation raises the risk that price pressures become more entrenched than the survey’s relatively benign longer-term projections assume.

A special question in the survey addressing the war’s indirect and second-round effects offered limited reassurance. Respondents expected those effects to be contained and concentrated in 2026 and 2027, suggesting that forecasters are not yet pricing in a sustained inflation overshoot. Whether that assessment holds will depend heavily on how long the conflict persists and whether energy prices stabilise or push higher still.

On growth, the picture is one of steady erosion. Real GDP growth expectations for 2026 were cut by 0.2 percentage points to 1.0%, with the ECB explicitly linking the downgrade to energy price drag. The 2027 forecast was trimmed by 0.1 percentage points to 1.3%, a level also projected for 2028 and 2030. Unemployment expectations were left unchanged, with the jobless rate seen at 6.3% this year, easing gradually to 6.1% by 2028, suggesting forecasters do not yet anticipate the growth slowdown translating into significant labour market deterioration.

The survey’s findings are sharpening divisions within the ECB’s governing council over the appropriate policy response. Slovak policymaker Peter Kazimir came closest to a commitment, describing a June rate hike as virtually certain and arguing that rising energy costs are feeding into the broader economy with no relief in sight from the conflict. The balance of risks on inflation, the survey noted, has tilted to the upside, lending weight to the hawkish case.

Bank of France Governor Francois Villeroy de Galhau struck a more measured tone, arguing that the ECB requires a critical mass of data covering core inflation, wages and expectations before making a move on rates. The distinction between the two positions reflects a genuine uncertainty at the heart of current ECB deliberations: whether the inflation pickup is severe and broad enough to justify tightening into a weakening growth environment, or whether patience remains the wiser course while the picture clarifies.