Goldman Sachs has cut its growth outlook for the Euro area after a month of military conflict with Iran that has sharply curtailed oil movements through the Strait of Hormuz. The bank now projects 4Q/4Q 2026 Euro area GDP growth of 0.7%, compared with a pre-conflict forecast of 1.4%.
Brent crude prices have stayed at or above $100 per barrel amid the disruption, and the volume of flows through the Strait of Hormuz remains extremely constrained at roughly 6% of normal levels. Those developments have prompted Goldman Sachs economists to revise up their inflation expectations and reconfigure their view on monetary policy.
The bank anticipates headline inflation in the Euro area will peak at 3.2% in 2Q. In response to higher near-term inflation, Goldman Sachs expects the European Central Bank to raise policy rates by 25 basis points at both the April and June meetings. However, the bank also expects those rate increases to be reversed in 2027 as inflation eases and the economy softens.
Data already show signs of weakening in the economy. The Euro area composite purchasing managers index fell to 50.5 in March from 51.9 in February, indicating a slowdown in the pace of expansion. At the same time, composite input prices jumped 6.5 points to 65.5, the highest reading in more than three years and matching a surge seen in March 2022.
Investor behavior has shifted notably in recent days. Fund flows that had supported European equities - largely driven by foreign buying - reversed this week, producing net outflows from European stocks. Domestic investors also moved from net buyers to net sellers as energy prices climbed and borrowing costs rose. That selling activity stands in contrast to the prior 12 to 15 months, when European investors were net buyers on expectations of fiscal-led growth improvement.
Foreign investors, a majority of whom Goldman Sachs identifies as US-based, had been steady purchasers of European assets since the start of 2025 and sustained that buying until this most recent week. As the conflict continued and forecasters trimmed global and European growth projections, foreign buying fell to zero. Goldman Sachs also flagged damage to Qatar's liquefied natural gas production infrastructure as a further contributor to the shift in flows.
On the broader history of flows, the bank noted these movements have been cyclical. Strong inflows into Europe in the post-pandemic period peaked in early 2022, then persistent outflows from 2022 through the end of 2024 erased those earlier gains. Over the last year, Europe benefited from renewed buying by both domestic and foreign investors. Even so, Goldman Sachs does not view Europe as over-positioned relative to other regions and continues to regard Europe as the least favored region when compared to alternatives for capital allocation.
The combination of elevated oil prices, constrained Hormuz flows and signs of weakening activity has prompted Goldman Sachs to downgrade growth, raise near-term inflation expectations and anticipate a short-lived further tightening in ECB policy that would likely be rolled back in 2027 as disinflation and softer growth take hold.