La ECB lights a new spotlight on the risks associated with the crisis in the Middle EastIn its August Economic Bulletin, Frankfurt described a eurozone economy still capable of holding its own, but exposed to a particularly delicate combination: weak growth, high energy prices, and possible renewed pressure on inflation. The truce negotiated between the United States and Iran has only produced a temporary relief on the energy markets. The resumption of attacks and the persistent instability in the Strait of Hormuz have brought the risk of supply disruptions back to the forefront, with potentially serious consequences for families and businesses.
The truce isn't enough, oil and gas remain under pressure.
Il memorandum of understanding reached in June between Washington and Tehran had initially favored a sharp drop in Brent, thanks to the commitment to restore free transit through the Strait of Hormuz. The However, the picture quickly deteriorated with the new military attacks and with the announcement of the end of the ceasefire by President Donald Trump. The ECB observes that the oil prices have started to rise again, while remaining overall 1% below the level recorded on June 11. Much stronger was the European gas reaction, which has fully recovered the decline following the agreement and reached prices 24% higher than at the beginning of the period under review. Compared to pre-conflict levels, oil is 30% more expensive, while gas has increased by 97%.
The latter is also supported by the European storages, still historically low for this time of year. "Following the agreement on the memorandum of understanding between the United States and Iran, oil prices have fallen, but the new attacks are making the situation extremely volatile," the Bulletin emphasizes.
Modest growth, but manufacturing and artificial intelligence hold up
The saving of the Eurozone showed a slight improvement in the second quarter of 2026, despite the slowdown exerted by the Middle East conflict. Services recovered some of the losses recorded after the energy shock, while the digital sector continued to benefit from the growth of artificial intelligence-related activities. The manufacturing sector has held up well, supported by rising inventories, investments in high technology and increased defense spending. labor market remains solid, with unemployment at 6,2% in May, near historic lows, but demand for new workers is slowing and employment prospects appear less favorable than before the conflict.
Frankfurt is expecting a growth still limitedIn the medium term, however, consumption, infrastructure, defense, new technologies, and a possible recovery in exports could provide greater support to economic activity. The ECB also reiterates its call for action to strengthen the single market, accelerate the energy transition, and complete the Savings and Investment Union.
Inflation at 2,8%, but the energy shock is not over yet
In June Eurozone inflation fell to 2,8%, from 3,2% in May. The energy component declined from 10,8% to 8,5%, while core inflation rose from 2,6% to 2,4%. Services inflation also slowed, from 3,5% to 3,2%. However, the improvement is not enough to reassure the ECB. Businesses continue to face high costs for energy and production inputs and anticipate further increases in selling prices. According to Frankfurt, "the full inflationary impact of the energy shock has yet to be felt," as price increases could gradually be passed on to goods, services, wages, and expectations.
The Bulletin provides that inflation could remain well above 2% until the first half of 2027, before declining thanks to a normalization of energy prices. Long-term expectations remain close to the ECB's target, while short-term expectations remain high.
Risks lean towards weaker growth and higher prices
Lo The scenario outlined by the ECB remains unbalancedOn the growth front, the prevailing trends are: downside risksA renewed disruption to energy supplies could keep oil and gas prices high for longer, reducing households' purchasing power and increasing business costs. Deteriorating confidence, tighter credit conditions, and renewed trade tensions could also dampen consumption, investment, and exports. Added to these uncertainties are the war between Russia and Ukraine, the potential fragmentation of global supply chains, supply difficulties for critical raw materials, and extreme weather events, which could further pressure food prices.
A lasting solution to the Middle East conflict would instead represent the main positive factor, with favorable effects on both growth and inflation. Increased defense and infrastructure spending, productivity reforms, and the adoption of new technologies could also boost the economy beyond expectations.
Rates remain unchanged, with the ECB promising neither cuts nor hikes.
At its meeting on 23 July, the ECB left the three reference rates unchangedThe deposit rate remains at 2,25%, the rate on the main refinancing operations at 2,40%, and the rate on the marginal lending facility at 2,65%.
Frankfurt reiterates that the next decisions will be made meeting by meeting, based on data on inflation, growth, credit, and monetary policy transmission. "The Governing Council does not intend to commit to a particular rate path," the document specifies.
La Caution therefore remains the Eurotower's guidelineWith inflation still above target and an economy exposed to new energy shocks, the ECB wants to maintain maximum room for maneuver, without anticipating either a cycle of cuts or a new tightening. The goal remains to steadily restore price growth to 2%, but the path now appears more bumpy than the June numbers suggest.
