Introduction#

The euro zone is currently facing significant economic challenges as rising energy prices, driven by the conflict in the Middle East, threaten to disrupt growth. Barclays has issued a warning that these conditions could lead the region into stagflation, a situation characterized by stagnant economic growth and high inflation.

Rising Energy Prices#

Since February 26, oil prices have surged by 29%, while gas prices have skyrocketed by 67%. If these price increases continue, Barclays estimates that they could reduce euro zone growth by 0.4 percentage points over the next year and increase consumer prices by up to 1.2 percentage points, based on sensitivity estimates from the European Central Bank (ECB).

Current Economic Indicators#

The euro zone's economic momentum has been uneven. In the fourth quarter of 2025, real GDP grew by just 0.2% quarter-on-quarter, revised down from an earlier estimate of 0.3%. This slowdown was largely due to a sharp contraction in Ireland, which saw a 3.8% decline. Excluding Ireland, growth was slightly better at 0.4%, supported by a 0.4% rise in private consumption and a 0.6% increase in investment.

Inflation and Wages#

Inflation remains a pressing issue, with the euro zone's headline inflation rate rising to 1.9% in February from 1.7% in January. Core inflation, which excludes volatile items like food and energy, also increased to 2.4%. On the wage front, compensation per employee grew at a slower rate of 3.7% year-on-year in Q4, slightly below ECB projections. Although negotiated wages rose by 3%, the slowing growth in labor productivity limited the decrease in unit labor costs.

Future Outlook#

Looking ahead, Barclays anticipates a modest quarterly GDP growth of 0.3% in the first half of 2026 and 0.35% in the second half, assuming the energy price shock is temporary. The euro zone's unemployment rate fell to 6.1% in January, indicating a resilient labor market. Governments in Italy, France, Belgium, and Spain are exploring targeted fiscal measures to mitigate the impact of rising energy costs, though these responses are expected to be more focused than those implemented during the previous energy crisis.