The new BDI Growth Outlook for Europe shows that, with GDP growth expected to reach just 0.7 percent, growth momentum in the eurozone will be halved compared to 2025 and remain well below potential growth of around 1.2 percent. While consumer spending continues to provide support, it is losing momentum due to rising energy prices. Investment is barely increasing, and foreign trade is slowing. Stabilizing impulses from monetary and fiscal policy are limited.

Energy Price Shock Slows the Recovery

As recently as early 2026, the European economy was on a solid course. However, with the escalation of the Iran conflict in late February, the picture has changed fundamentally. So far in the second quarter of 2026, oil prices have averaged about 50 to 55 percent higher than a year ago, while gas prices are up by about 30 percent. A rapid easing of the situation is not yet in sight.

Higher energy costs are eroding household purchasing power and increasing production costs for businesses. Inflation rose to 3 percent in April—driven almost exclusively by the energy component, which surged to 10.8 percent. Core inflation, by contrast, stands at a moderate 2.2 percent. The key question is whether the price shock will become permanently entrenched through expectations and wages. So far, no such second-round effects are apparent.

The following chart shows how the contribution to growth from the individual components has developed since 2022: While private consumption remains the most important driver, its contribution is declining. Investment remains subdued, and foreign trade has recently made a negative contribution. After a temporary recovery in 2025, industrial production has been declining again since February 2026.

Outlook Depends on the Course of the Conflict

The extent to which the economy will ultimately be affected depends on the duration and intensity of the conflict. The impact will be felt through several channels: higher energy prices, growing uncertainty, tighter financing conditions, and disruptions in global supply chains—particularly through the Strait of Hormuz.
Our forecast assumes that the energy price shock will be noticeable but not extreme—though it will last significantly longer than many international forecasts suggest. If the situation de-escalates quickly, growth could rise to 0.8 to 1 percent. If the conflict persists or escalates further, growth could slow to 0.2 to 0.4 percent. Should the Strait of Hormuz remain blocked for the entire year, even a recession cannot be ruled out.

Europe must strengthen the structural conditions for growth

In addition to short-term crisis management, a long-term question is coming to the fore: How can Europe improve its foundations for stronger growth? The BDI Growth Outlook identifies key areas for action:

• Deepen the single market—especially in services, energy, and digitalization. Trade costs within Europe are high by international standards; reducing them would strengthen competition and productivity.
• Mobilize investment – Europe faces an investment gap of over 1.2 trillion euros annually. EU instruments such as InvestEU, IPCEI, and the European Competitiveness Fund must be used in a more targeted manner.
• Accelerate structural reforms – reduce regulatory complexity, deepen the Capital Markets Union, and reform labor and product markets.
• Diversify trade – Consistently implement agreements with India, Australia, and the Mercosur countries to reduce dependencies and secure export opportunities.
• Make the energy supply more resilient—re-establish a balance among the three objectives of security of supply, competitiveness, and sustainability, and restore internationally competitive price levels for electricity and gas.