EU to Cut Growth Outlook, Raise Inflation Forecast as Iran War Drives “Stagflationary Shock”

• The European Union (EU) is expected to cut its growth outlook and raise its inflation forecast, as the Iran war creates what European Commissioner Valdis Dombrovskis described as a “stagflationary shock.”
• According to Dombrovskis, the European Commission’s spring forecast, due later this week, will show growth figures revised down and inflation figures revised up, reflecting the economic strain from higher energy prices and supply disruptions. Stagflation fears have intensified as a lasting settlement to the war remains elusive, while the Strait of Hormuz stays closed and oil prices remain above US$100 per barrel.
• The European Commissioner added that policymakers have less room to respond than during the pandemic. He noted that support measures should be temporary and targeted, rather than broad-based policies that could sustain high demand for fossil fuels.
• While the EU’s release of strategic oil reserves is ongoing, officials remain concerned that a prolonged conflict could create supply bottlenecks, including in areas such as innovation fuels.
• Furthermore, strategists and the International Energy Agency (IEA) warned that global oil inventories are shrinking rapidly, with depleted buffers raising the risk of future price spikes and possible shortages in Europe.
• The EU faces a difficult policy trade-off: cushioning households and firms from higher energy costs without worsening inflation or prolonging fossil-fuel demand, while weaker growth limits fiscal space.

(Source: CNBC)