Pessimism sets in for Europe as Iran war hits economic and consumer confidence

• EU economic sentiment fell 1.5 points to 96.7 and euro area sentiment dropped 1.6 points to 96.6 in March, with consumer confidence hitting its lowest level since October 2023
• The ECB now expects 2026 economic growth of just 0.9% with inflation averaging 2.6% this year, prompting warnings from ECB President Lagarde about potential interest rate hikes
• European officials fear long-term economic damage from the conflict, as Iran's near-total closure of the Strait of Hormuz continues to push up global energy prices

SUMMARY

European economic and consumer confidence deteriorated sharply in March as the Iran war entered its fifth week, according to European Commission flash data. Economic sentiment fell 1.5 points to 96.7 in the EU and 1.6 points to 96.6 in the euro zone—both below the long-term average of 100. Consumer confidence dropped to its lowest level since October 2023, driven by pessimistic expectations about overall economic conditions and household finances.

The conflict has upended growth and inflation forecasts across Europe. The European Central Bank now projects 0.9% economic growth for 2026 and 2.6% headline inflation for the current year. Euro zone private sector output fell to a 10-month low in March, raising stagflation concerns. ECB President Christine Lagarde indicated readiness to raise interest rates if necessary.

Employment expectations weakened across retail, services, and industrial sectors as employers adjusted hiring plans amid the ongoing Middle East crisis. Iran's retaliatory strikes and near-total closure of the Strait of Hormuz have pushed global energy prices higher, with Germany's defense minister calling the conflict a "catastrophe" for world economies.

President Trump has sent mixed signals, alternating between possible peace negotiations through Pakistan and threatening a potential ground offensive or seizure of Iran's Kharg Island export hub. European leaders have refused involvement in the U.S.-Israel bombardment but face mounting economic consequences.

Senior European officials believe the conflict's economic and political implications—particularly regarding transatlantic stability—will prove worse than initially expected. Markets are pricing in several more weeks of conflict, with analysts noting a "rising risk profile" and "grave uncertainty" about near-term outcomes.