Barclays has signalled that the euro zone faces one of its most significant economic tests in years as a sharp rise in energy costs driven by the Middle East conflict threatens to sap growth and push consumer prices higher. The bank quantified the potential fallout using European Central Bank sensitivity estimates and current market moves in oil and gas.
Magnitude of the shock
Barclays noted that oil has climbed 29% since Feb. 26 and gas has jumped 67% over the same period. If those price shifts persist, the bank estimates they would reduce euro zone growth by 0.4 percentage points over the coming year and add as much as 1.2 percentage points to consumer prices, based on the ECB sensitivities Barclays cited.
Monetary policy backdrop
The ECB’s deposit rate is currently at 2%. Barclays expects the central bank to keep that rate unchanged. ECB Governing Council member José Luis Escrivá was quoted emphasizing that a policy rate move is very unlikely at the next meeting and that the bank should avoid reacting to short-lived inflation moves.
Growth entering the shock
The warning comes at a time when momentum in the euro area was already uneven. Real GDP was revised down to 0.2% quarter-on-quarter in Q4 2025, from a prior estimate of 0.3%, after Ireland recorded a steep 3.8% quarterly contraction. Excluding Ireland, aggregate growth in the euro zone remained at 0.4% in Q4, driven primarily by private consumption, which rose 0.4%, and investment, which expanded 0.6%, according to Barclays’ reading of Eurostat data.
Inflation and labour cost dynamics
Inflation presented a mixed picture. Headline HICP inflation for the euro zone rose to 1.9% year-on-year in February, up from 1.7% in January, while core inflation increased to 2.4% from 2.2%, a move Barclays said was driven by firmer core goods and services prices.
On wages, compensation per employee slowed to 3.7% year-on-year in Q4, which was 0.2 percentage points below the ECB’s projections. Negotiated wages were reported at a 3.0% increase. Labour productivity growth weakened to 0.6%, meaning unit labour costs eased only slightly to 3.1%. Unit profits accelerated to 2.0%, which nudged the GDP deflator up by 0.1 percentage points to 2.5%, Barclays added.
Forward indicators and labour market
Forward-looking indicators implied continued but softer expansion. The composite PMI for February held at 51.9, with manufacturing strengthening to 51.9 from 50.5 in January and services steady at 51.9. Germany stood out at 53.2, while France remained marginally below the 50 no-growth mark at 49.9, Barclays reported citing Haver Analytics.
The unemployment rate in the euro zone fell to 6.1% in January from 6.3% in December, a sign the labour market remained resilient despite weak output growth.
Barclays growth projections conditional on energy shock duration
Barclays projected quarterly GDP growth of 0.3% in the first half of 2026 and 0.35% in the second half, but it stressed these forecasts assume the energy price shock is short-lived. If the higher energy prices persist, the earlier noted hit to growth and lift to inflation would materialize according to the bank’s calculations.
Fiscal responses and constraints
Governments may seek to blunt part of the energy shock through fiscal measures. Italy, France, Belgium and Spain were reported to be in discussions with energy producers about changes to excise and tax arrangements, Barclays said, while warning any fiscal response would likely be narrower than the broad measures used during the 2021-23 energy crisis because of tighter budgetary room.
Barclays highlighted differences in public finances across major economies: France’s government deficit was estimated at 5.4% of GDP in 2025 with debt at 116.4% of GDP, while Germany’s deficit was forecast at 2.7% with debt at 63.0%.
This analysis draws solely on Barclays’ recent note and the economic data cited within it. The figures quoted reflect the specific estimates, revisions and projections Barclays reported using Eurostat and ECB sensitivities as the basis for their assessment.