Shoppers walk past fruit and vegetable stalls at the Beau Beau Market in Paris, France, Wednesday, February 15, 2023.
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Economic and consumer confidence plunged in Europe in March, official data released on Monday showed, the latest evidence of how the Iran war is upending growth and inflation expectations.
Business confidence fell in March in both the EU (down 1.5 points to 96.7) and the euro area (down 1.6 points to 96.6), according to preliminary data from the European Commission.
The figures, which measure business confidence in five major sectors of the European economy, also reveal that employment expectations are under pressure across the EU and eurozone. Employers in the retail, service and industrial sectors are all adjusting hiring plans in the wake of the ongoing wars in the Middle East.
The recession has added to the deterioration seen in February, but the committee warned that the latest figures show a “significant deterioration in business confidence in March”, moving both business confidence and employment expectations away from the “long-term average of 100”.
Consumer confidence also plummeted to its lowest level since October 2023 “due to a dramatic decline in consumer expectations about the overall economic situation in their country.”
“Consumers also became significantly more pessimistic about their households’ future financial situation and were less likely to make large purchases over the next 12 months,” the commission added.
It comes after separate data showed eurozone private sector output fell to a 10-month low in March and is heading into contraction territory, raising fears of impending “stagflation”.
In revised forecasts released by the European Central Bank on March 19, it expects economic growth to grow by 0.9% in 2026 and headline inflation to average 2.6% this year.
ECB President Lagarde said last week that the central bank was closely monitoring the data and would respond by raising interest rates if necessary.
Elevated risk profile
European leaders see war as a choice, not an inevitability, and reject involvement in the US and Israeli shelling of Iran.
Nevertheless, Iran’s retaliatory strikes and near-total blockade of the Strait of Hormuz have pushed up global energy prices, with Germany’s defense minister warning last week that the conflict was a “catastrophe” for the global economy.
US President Donald Trump signaled last week that he would someday seek peace talks with Iran through Pakistan’s mediation, but no formal talks have yet been confirmed by the White House or Iran.
At the same time, however, the United States has sent thousands of troops and military resources to the region, signaling the possibility of a ground attack. Things got even muddier, with President Trump telling the Financial Times on Sunday that he could “take oil from Iran” and seize Iran’s export hub, Kharg Island.
Mujtaba Rahman, managing director for Europe at Eurasia Group, said European officials are concerned that the economic and political fallout from the conflict is likely to prove far worse than originally thought.
“I have spent the past week and a half in Brussels discussing the Iran war and its impact on Europe with more than 60 senior European officials,” Rahman said in an email analysis on Saturday.
“Among those I spoke to, there was near unanimous agreement on three points: First, the regime in Tehran is likely to survive and, although weakened, it will be more determined and radical than its predecessor,” he noted.
“Second, it is highly unlikely that any effort to secure the Strait of Hormuz will come together for the foreseeable future. Third, the economic and political consequences of the conflict, particularly regarding the stability of the transatlantic alliance, are likely to prove far worse than the consensus view,” he added.
Holger Schmieding, chief economist at Berenberg, said markets were pricing in the conflict to last at least a few more weeks and that “in the short term, things are likely to get worse than better.”
“But the market is also hesitant to go really, really negative because with President Trump, you just don’t know. Maybe in a few days, President Trump will announce the outcome of the negotiations,” he told CNBC’s “Squawk Box Europe” on Monday.
“What we’re seeing now is a lot more uncertainty and a number of things that could happen over the next week. Either the start of a limited but still possible ground invasion, or the possibility of an agreement. So the overall risk profile has gone up and there’s (there is) severe uncertainty — that’s what it looks like right now,” he said.
