Barclays Lowers Euro Area Growth Forecast Amid Middle East Tensions

Economic Outlook for the Euro Area#

Barclays Research has revised its growth forecast for the euro area, anticipating a slowdown to 1.1% in 2026, down from 1.5% in 2025. This adjustment is largely attributed to the ongoing conflict in the Middle East and tighter financial conditions affecting the region. The European Central Bank (ECB) is expected to maintain its benchmark deposit rate at 2% during its upcoming meeting on March 19.

Inflation and GDP Projections#

The brokerage predicts that headline inflation will rise to 2.4% this year, which is an increase of 0.6 percentage points from previous estimates made in December. Following this peak, inflation is expected to ease to 2% by 2027. Barclays’ nowcasting model suggests that the euro area’s GDP might contract by 0.1% in the first quarter of 2026, contrasting with the ECB’s projection of a 0.3% growth.

Industrial Production and Economic Challenges#

Recent data indicates a decline in industrial production, which fell by 1.5% month-on-month in January. Germany saw a contraction of 1.3%, while Italy and Spain experienced declines of 0.6% and 0.5%, respectively. Additionally, German factory orders plummeted by 11.1% in January, nearly erasing gains made in the latter half of 2025.

Regional Growth Variations#

Among the largest economies in the euro area, Spain is projected to lead with a growth rate of 2.3% in 2026. In contrast, Germany is expected to grow by 0.9%, France by 1.1%, and Italy by 0.7%. France faces significant fiscal challenges, with a projected deficit of 5.2% of GDP and government debt anticipated to rise to 118.6% of GDP.

Trade Investigations and Political Landscape#

On the trade front, the United States has initiated an investigation into EU trade practices as of March 12, aiming to determine if these practices contribute to excess manufacturing capacity. Additionally, France is gearing up for its first round of municipal elections on March 15, with the performance of Marine Le Pen’s Rassemblement National being closely monitored ahead of the national elections in 2027.