This Europe Chart Pack builds on the analysis and scenario forecasts published in the Global Economic Outlook (see here) to provide more detail on how the Iran War could influence inflation, GDP growth, the labour market and interest rates in the euro-zone.
Prospects for the euro-zone economy are very sensitive to the severity and duration of the increase in energy prices. Our forecasts are based on an assumption that crude oil and European natural gas prices peak at quarterly averages of $90pb and €70MWh respectively in Q2 this year and then gradually decline. If that proves accurate, headline inflation would rise to around 4% and core inflation would rise from 2.3% in March to nearly 3%, rather than falling as we had previously assumed. The ECB would respond to higher inflation by raising its deposit rate from 2.0% currently to around 2.50%, though it should be able to reverse those hikes next year. Meanwhile, we think the energy price shock will cause economic growth to stagnate for a couple of quarters but a significant recession should be avoided.
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