Middle East energy shock slows eurozone growth and lifts inflation

A conflict in the Middle East has triggered a major energy shock that is now slowing economic growth and pushing inflation higher across Europe, according to new data and official forecasts. The disruption to energy markets is presenting policymakers with a complex dilemma as they attempt to balance price stability with weakening demand.

The European Commission has downgraded its growth projections, forecasting eurozone gross domestic product will slow to 0.9 percent this year, down from 1.4 percent in 2025. Inflation across the currency bloc is now expected to hit 3.0 percent this year, exceeding the European Central Bank's 2 percent target. European Economy Commissioner Valdis Dombrovskis stated the conflict has triggered a major energy shock, warning that growth forecasts could be roughly halved if energy prices do not peak until late in the year.

Business activity surveys released Thursday show the economic impact is intensifying. The Flash Eurozone Composite Purchasing Managers' Index, a key gauge of private sector health, fell to 47.5 in May, marking the second consecutive month of contraction. A reading below 50 indicates shrinking activity. The services sector, the...