The International Monetary Fund has lowered its growth forecast for the euro zone and raised its inflation projection for 2026, citing the economic fallout from the U.S.-Israeli war on Iran and the risk that high energy prices may persist.
In its routine review of the economies of the 21 countries that share the euro, the IMF said it now expects economic growth of 0.9% this year, down from the 1.1% estimate published in April. At the same time, the fund raised its inflation forecast to 2.8%, up from 2.6% in April.
The fund's update, presented to euro zone finance ministers, described the conflict in the Middle East as a "large but temporary adverse supply shock" and said the region's economic outlook has deteriorated after a phase in which growth was roughly at potential and inflation close to target.
"Following a period of growth at potential and inflation on target, the euro area outlook has weakened," the IMF said in the report.
The IMF warned that if energy price disruptions become more persistent they could lift inflation and expectations of inflation further, while an erosion in confidence or episodes of financial stress could weigh on demand.
It also highlighted a set of downside risks that could further undermine the recovery: a renewed escalation of the conflict in the Middle East, delays in repairing energy infrastructure, intensified hostilities in Ukraine, and additional trade policy adjustments.
The fund commented on monetary policy developments, noting that the European Central Bank, which earlier on the same day raised interest rates for the first time in nearly three years, is likely to raise rates again for a cumulative 50 basis point increase in 2026. The IMF said a third rate rise in 2026 is also possible.
Turning to fiscal policy, the IMF advised euro zone finance ministers against broad-based fiscal support to counter high energy costs, saying such measures are not warranted. Many member countries have already taken steps, the IMF noted, with support measures averaging around 0.1% of GDP across the European Union on a GDP-weighted basis as of May 2026.
While acknowledging the limited scale of these measures so far, the IMF said they have probably reduced incentives for energy conservation and recommended that any future support be more narrowly targeted to protect vulnerable households rather than widely applied.
The report frames a cautious short-term outlook for the euro area: growth expectations have been trimmed, inflation pressures have been revised higher, and the policy mix is likely to include further monetary tightening alongside calls for targeted fiscal relief where needed to shield the most vulnerable.
Clear summary: The IMF cut its euro zone 2026 growth forecast to 0.9% from 1.1% and raised its inflation projection to 2.8% from 2.6%, attributing the revisions to the U.S.-Israeli war on Iran and warning that persistent energy price shocks and other geopolitical developments could further weaken the outlook. The fund urged targeted fiscal support for vulnerable households and said the ECB is likely to raise rates further in 2026.