Eurozone inflation soars to 3% as economic growth nearly stalls

Preliminary data on Thursday showed the euro zone economy expanded by just 0.1% in the first quarter of this year, as the Iran war hurt growth in the region and increased inflationary pressures.

The report comes as preliminary data shows consumer prices in the single currency bloc are creeping up, with inflation rising to 3% in April from 2.6% in the 12 months to March and 1.9% the month before.

The data comes ahead of the European Central Bank’s next monetary policy decision on Thursday, with the European Central Bank’s board widely expected to keep the benchmark interest rate unchanged at 2% as it assesses the effects of inflationary pressures from the Iran war, particularly rising fuel prices.

Energy costs pushed up the latest inflation rate, rising 10.9% from 5.1% in March, according to statistics agency Eurostat. Inflation in the region is currently well above the central bank’s 2% target, putting pressure on policymakers to consider raising interest rates.

Economists fear that Europe could face a period of “stagflation” with low growth, inflation and rising unemployment as the war prompts global energy shortages, rising prices and weakening business and consumer confidence.

The problem for the ECB, however, is that efforts to rein in inflation through interest rate hikes could further weigh on economic activity and consumer confidence. Rising energy prices due to the Iran war, the main cause of current inflationary pressures, are also beyond the bank’s control.

One bright spot for ECB policymakers was that core inflation, which subtracts more volatile food and energy prices, fell to 2.2% in April from 2.3% the previous month. This shows that the dreaded “second round effects” caused by surging inflation have not yet materialized.

Secondary effects refer to the more indirect effects of a sudden inflation shock, such as workers demanding higher wages or businesses raising prices, which can lead to an upward spiral in inflation. Such effects are often more “persistent” and prove difficult for central bankers to quell through monetary policy decisions.

“At the very least, this confirms that short-term risks to core inflation are contained, and the data does not indicate a need for[the ECB]to act quickly. This is consistent with our long-standing view that the ECB wants to hold policy in April and keep all options on the table until its next meeting,” Morgan Stanley analysts said in an emailed analysis Thursday.

Still, the continued closure of the Strait of Hormuz, a key oil and gas shipping route, is a major concern for Europe, which is already scrambling to source oil and gas and jet fuel from suppliers outside the Middle East, where demand and competition are increasing.

“The world is a dangerous place,” Berenberg economists warned in an emailed analysis last week, noting that President Trump’s tariffs, China’s subsidies to boost exports, as well as the fallout from the Iran war, are currently “hurting the European economy.”

“The Strait of Hormuz remains largely closed and widespread uncertainty weighs on confidence, while the euro zone and UK economies are likely to suffer stagflation. Even if the worst of the war is over by the end of April, as our base case assumes, European growth this year will be below last year’s pace,” he said, urging the ECB to tighten interest rates for now.

“The outlook after that will depend largely on the ECB. In our view, inflation risks are much more contained than in 2022…However, if the ECB raises rates in response to a temporary spike in inflation, “If this happens, the eurozone could first slip into an unnecessary mini-recession in late 2026 or early 2027 before the economy begins to recover from its policy mistakes. It would be a pain for the ECB to remain on hold this year.”