FX.co ★ ECB tightens credit screws as inflation hits household budgets and growth slows

The eurozone faces a sharp economic slowdown in 2026 amid an energy crisis stemming from the Middle East. Deutsche Bank Research has downgraded its GDP growth forecast for the region by more than half — from 1.1% to 0.5%.

The bank expects the European economy to contract by 0.1% in the second quarter, to stagnate in the third, and to register only modest growth by year end. The shock to the eurozone stems from falling purchasing power, weak global demand for exports, and costly credit. Deutsche Bank estimates that higher energy import bills alone will eat up roughly 1% of European GDP.

Inflation will accelerate to 3.1%, versus a precrisis expectation of 1.7%. To bring prices down, the European Central Bank will be forced to continue a measured tightening cycle and is forecast to raise the deposit rate by a total of 50 basis points to 2.50% by September.

Outlooks for the bloc’s largest economies are bleak. Germany’s GDP is projected to grow only 0.5%, funded in part by a swollen budget deficit of 4.1%. France is expected to post similar growth but with a deficit above 5%. Italy is the laggard at 0.4%, supported only by a remaining €72 billion package of EU crisis subsidies. Against this backdrop, the United Kingdom looks comparatively stronger, with expected growth of 1% and stable Bank of England policy rates.

Deutsche Bank warns the scenario could worsen. If the Strait of Hormuz remains blocked all summer, eurozone growth in 2026 will fall to zero, and inflation may spike to 3.5%.