Europe’s economy showed minimal growth in the first quarter of 2026, as ongoing conflict in the Middle East disrupts a fragile recovery. Eurostat reported the eurozone expanded at an annualized rate of 0.6% during the quarter, equating to a modest 0.1% increase compared to the final months of 2025.

Inflationary pressures are mounting, with consumer prices in the eurozone rising 3% in April year-over-year—surpassing expectations. This surge is largely attributed to the region’s reliance on imported energy and the spike in natural gas and oil prices following a continued blockade of the Strait of Hormuz, a critical shipping route.

The combination of subdued economic growth and rising inflation—a condition known as stagflation—poses significant challenges for European monetary policymakers. Both the European Central Bank (ECB) and the Bank of England maintained their current interest rates on Thursday, aligning with the U.S. Federal Reserve’s decision to hold borrowing costs steady.

However, officials in Europe appear poised to increase rates in the coming months to address inflation pressures accentuated by the geopolitical tensions. The ECB highlighted that prolonged conflict in the Middle East and sustained high energy prices will likely have a pronounced effect on inflation and the broader economy.

The bank’s current projections estimate eurozone growth at 0.9% for 2026, a downward revision from the 1.2% forecast issued before the outbreak of hostilities. ECB President Christine Lagarde cautioned that even this outlook may be overly optimistic given the evolving uncertainties.