Prospects for the euro-zone economy have deteriorated due to the Iran war and related energy price shock. After declining in Q1 (due to a slump in Ireland) we forecast euro-zone GDP growth to flatline in Q2. We also forecast both headline and core inflation to rise in the coming months to peaks of around 3½% and 2½% respectively. Policymakers at the ECB have indicated that they will raise rates in June, and we expect one more hike in the third quarter. However, provided there is no new leg-up in energy prices we think the economy will return to growth in the second half of the year and inflation should prove to be transitory with little second-round effects. If so, the ECB will be able to reverse its rate hikes by the end of 2027.
We will be hosting an Online Drop-In ahead of the June ECB meeting, featuring a special briefing on how the latest energy shock is shaping discussions within the Governing Council. The session will take place at 10:00 ET / 15:00 BST on Tuesday, 9 June. Register here
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