Barclays lowers the eurozone's 2026 growth forecast to 1.1% and expects the European Central Bank to keep interest rates unchanged amid Middle East tensions.

Investing.com - Barclays Research recently stated in a report that the Eurozone economy faces multiple pressures from Middle Eastern conflicts and tightening financial conditions. It is expected that the European Central Bank will keep the benchmark deposit rate unchanged at 2% at the March 19 meeting.

The broker forecasts that the Eurozone’s real GDP growth will slow from 1.5% in 2025 to 1.1% in 2026, while overall inflation will rise to 2.4% this year, up 0.6 percentage points from December’s forecast, then fall back to 2% in 2027.

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Barclays’ immediate forecast model shows that in the first quarter of 2026, Eurozone GDP will contract by 0.1% quarter-on-quarter, below its own forecast and the European Central Bank’s predicted 0.3% growth.

Barclays cites ECB President Christine Lagarde’s statement at the post-meeting press conference: “The European Central Bank will take necessary measures to maintain the medium-term inflation target,” adding that the Governing Council will emphasize that “policy rates are not on a preset path.”

Eurozone industrial production in January decreased by 1.5% month-on-month, with Germany shrinking by 1.3%, Italy by 0.6%, and Spain by 0.5%. German factory orders in January plummeted 11.1% month-on-month, nearly erasing all growth from the second half of 2025.

Under the scenario where Brent crude oil remains steady at $100 per barrel and TTF natural gas stays at €70 per megawatt-hour (up about 40% and 120% respectively since the conflict erupted), Barclays estimates that Eurozone GDP could decrease by 0.6 percentage points within a year, and consumer prices could rise by up to 1.4 percentage points over 12 months.

Barclays states that any fiscal response measures will be “more limited and targeted,” unlike the emergency support measures deployed after Russia’s invasion of Ukraine, which amounted to about 3% of nominal GDP at the time.

Among the region’s four largest economies, Spain remains the strongest, with Barclays expecting 2026 growth of 2.3%. Germany is forecast to grow by 0.9%, France by 1.1%, and Italy by 0.7%.

France bears the heaviest fiscal burden, with its 2026 deficit expected to be 5.2% of GDP, and government debt rising to 118.6% of GDP.

In trade, the U.S. launched an investigation into EU trade practices on March 12 to assess whether they lead to manufacturing overcapacity.

France will hold the first round of municipal elections on March 15. Barclays views the performance of Marine Le Pen’s National Rally as a barometer of the party’s standing ahead of France’s 2027 national elections.

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