IMF Cuts Eurozone 2026 Growth Forecast To 0.9% As Middle East War Fuels Inflation

The International Monetary Fund (IMF) cut its 2026 eurozone growth forecast to 0.9% from 1.4% in 2025, warning that the war in the Middle East will push inflation to 2.9% as energy market disruptions weigh on the economy. Growth slowsGrowth is expected to recover modestly to 1.2% next year, the IMF said in a statement Thursday, but 2026 and 2027 forecasts are below pre-war estimates by 0.5 percentage points and 0.2 percentage points, respectively.Headline inflation is projected to ease to 2.3% in 2027 after peaking this year. The international lender warned that risks remain tilted toward weaker growth and higher inflation, with prolonged disruptions to global energy supplies emerging as the biggest source of uncertainty.Middle East conflictThe IMF said the eurozone entered 2026 from a position of relative strength following a period of stable growth and inflation near target.However, the conflict in the Middle East has weakened business and consumer confidence, tightened financial conditions, and reignited inflationary pressures through higher energy costs.The fund also noted that continued effects from Russia’s war in Ukraine, along with uncertainty surrounding tariffs and global trade policies, could further dampen economic activity.Financial stability risks have also increased, with the IMF cautioning that a sharp deterioration in global market sentiment or stress among leveraged non-bank financial institutions could spill over into banks and broader funding markets.Balanced policy response The IMF called for a carefully calibrated policy mix aimed at containing inflation while cushioning the economic impact of the current shock.It recommended that monetary policy remain data-dependent and focused on keeping inflation expectations anchored through clear communication and scenario-based guidance.On fiscal policy, the fund said governments should rely primarily on automatic stabilizers, while any additional support should be temporary, targeted, and consistent with long-term fiscal sustainability. It also stressed the importance of structural fiscal consolidation, particularly in highly indebted member states.Structural reformsBeyond near-term stabilization, the IMF urged eurozone policymakers to accelerate reforms that strengthen long-term competitiveness and resilience.Priority areas include improving energy security, deepening the EU single market, advancing the Savings and Investments Union, expanding labor mobility, and improving AI readiness.The fund also backed continued efforts to diversify trade partnerships while maintaining an open, rules-based global trading system. It said measures to reduce external supply chain vulnerabilities should remain targeted to avoid unnecessary economic distortions.Surprising factDespite rising uncertainty, the IMF noted that the eurozone’s banking sector remains resilient, while calling for stronger stress testing, enhanced supervision of non-bank financial institutions, completion of the Banking Union, and continued monitoring of emerging risks, including stablecoins.