Euro Area Growth and Inflation Projections Revised Down Due to Iran War

ECB-CONFIDENTIAL

Monetary policy in times of geopolitical fragmentation

Isabel Schnabel Member of the Executive Board of the ECB

University of Zurich 27 March 2026

www.ecb.europa.eu © Staff projections see lower growth and higher inflation due to Iran warRubric

Real GDP growth in the euro area HICP inflation in the euro area

(quarter-on-quarter percentage changes) (annual percentage changes)

March 2026 staff projectionsMarch 2026 staff projections March 2026 staff projections - Adverse scenarioMarch 2026 staff projections - Adverse scenario March 2026 staff projections - Severe scenarioMarch 2026 staff projections - Severe scenario December 2025 staff projectionsDecember 2025 staff projections HICP inflationGDP growth122.5 102.0 81.5 61.0 40.5 20.0 0-0.5 2021 2022 2023 2024 2025 2026 2027 20282021 2022 2023 2024 2025 2026 2027 2028 Sources: Eurostat and Eurosystem staff projections (March 2026).Sources: Eurostat and Eurosystem staff projections (March 2026). Notes: The vertical line indicates the start of the March 2026 projection horizon. The solid line Notes: The vertical line indicates the start of the March 2026 projection horizon. The indicates published data, while the dashed lines indicate projections. horizontal dotted line indicates the 2% medium-term inflation target. The solid line indicates Latest observation: Q4 2025 (second estimate).published data, while the dashed lines indicate projections. Latest observation: Q4 2025 (second estimate). .Global economy is shifting from globalisation to fragmentation ©Rubric

Trade policy uncertainty Euro area–US bilateral effective tariff rate

(index) (percent) 14.02000 13.1 April tariffs 12.11800 12.0 10.51600 10.2 10.0 1400 Supreme 8.01200 court ruling1000 6.0 800 4.0600 2.0400 1.5 200 Iran 0.0 war Pre- June September December March0 Trump 2025 2025 2025 2026 01/16 01/18 01/20 01/22 01/24 01/26 16/03/26 projections projections projections projections

Sources: Bloomberg and ECB staff calculations. Sources: Trade Data Monitor, White House, WITS and ECB staff calculations.Notes: Dark yellow line denotes the 30-day moving average of the trade policy uncertainty Notes: The effective tariff rate is calculated by weighting on 2024 US-reported import index, whereas the light blue line represents the daily series. values at the HS6 product level. Latest observation: 16 March 2026 (reporting lag).

Euro area remained resilient due to robust domestic demand and strong labour markets ©Rubric

Unemployment rate and employmentReal GDP and components

(lhs: percentages; rhs: millions of persons)(year-on-year percentage changes; percentage point contributions) Domestic demand (incl. inventories)Unemployment rate Employment (rhs)Net exports13 180Real GDP growth 3.0 12 175 2.5 11 1702.0 1.510 165 1.09 160 0.5 8 1550.0 -0.57 150 -1.06 145 -1.5 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q45 140 2000 2005 2010 2015 2020 20252023 2024 2025

Source: Eurostat. Sources: Eurostat and ECB staff calculations. Latest observation: 2025 Q4. Last observation: 2025 Q4.

Chinese competition is weighing on euro area’s export performance ©Rubric

Global export market shares Number of product categories with comparative of non-energy goods volumes advantage of both China and other countries

(percentage point change since 2010) Euro area United States China 20008 2024 70 4 60 0 50 -4 40 30-8 20 -12 10 -16 02010 2012 2014 2016 2018 2020 2022 2024 Italy Germany Japan France Spain USSources: CPB, TDM and ECB staff calculations.Notes: Long-run trends in export market shares in volume terms should be interpreted with caution. Euro area Sources: UNCTAD and ECB staff calculations.export volumes and world import volumes are not fully consistent, as each statistical office employs specific Notes: The chart shows comparative advantage, referring to the revealed comparativemethodologies for deflating and outlier cleaning. These methodologies may differ in terms of outlier detection and advantage indicator, measuring the ratio between the share of country’s exports in areplacement and quality adjustment. Based on this, the volumes (excluding energy) series used to compute the particular product category in its total exports, and the same share for the world as aexport market shares shown in the chart are calculated by taking CPB (CPB Netherlands Bureau for Economic whole. A country has comparative advantage if the value of this ratio is above 1.Policy Analysis) volumes (in 2005 chain linked billion euros) and subtracting the share of energy exports. This shareof energy exports is based on TDM (Trade Data Monitor) values and includes HS2 sectors 25, 26, 27, 97, 98, 99.Trade patterns are shifting, with EU aiming at expanding trade agreements ©Rubric

EU free trade agreements and their potentialShare of within-bloc trade (percent)(share of world trade)

Share of EA trade 2024 Share of world trade in 20300.7330 0.71 250.69 0.6720 0.65 15 0.63 100.61 0.595 0.57 00.55FTA in place FTA being FTA United States1995 1999 2003 2007 2011 2015 2019 2023 adopted or negotiations ratified

Sources: European Commission , IMF WEO and Trade Data Monitor.Source: CEPII BACI.Notes: Trade includes exports and imports of goods. “FTA in place” includes Albania, Andorra,Notes: Bloc definition based on countries’ ideal point distance in UN voting (Bailey et al., 2017)Bosnia and Herzegovina, Canada, Switzerland, Chile, Colombia, Costa Rica, Ecuador, Unitedrelative to China and USA. The chart shows the share of world trade that involves two countriesKingdom, Georgia, Guatemala, Honduras, Iceland, Japan, South Korea, Moldova, Mexico,that are in the same geopolitical bloc. There are two geopolitical blocks, which may be calledNorth Macedonia, Montenegro, Nicaragua, Norway, New Zealand, Panama, Peru, Singapore, ElWestern and non-Western bloc.Salvador, Serbia, Turkey, Ukraine, Vietnam and Kosovo. “FTA being adopted” includesLatest observation: 2025.Australia, MERCOSUR, India and Indonesia. “FTA being negotiated” includes Malaysia, Philippines, Thailand and the UAE.Geopolitical shocks push up energy prices, worsening the euro area’s terms of trade ©Rubric

Citigroup Commodities Geopolitical riskTerms-of-Trade index

(index) (index) EA US (RHS)1100 -5 -109/11 April tariff1000 -10.5 announcement900 -6 Improvement -11 T-o-T800 -11.5 -7700 Iran -12Iraq war warFirst gulf war600 April tariffs -8 -12.5 Russian invasion 500 of Ukraine -13400 -9 Arab Spring -13.5 Deterioration 300 T-o-T -14200 -10 Start of -14.5100 Iran war -11 -150 Jan-25 Apr-25 Jul-25 Oct-25 Jan-26 23/03/2601/85 01/93 01/01 01/09 01/17 01/25

Sources: LSEG, Bloomberg and ECB staff calculations. Source: Bloomberg.Notes: Dark blue line denotes the 30-day moving average of the geopolitical risk index, whereas the light blue line represents the daily series. Latest observation: 23 March 2026 (reporting lag).Higher energy prices have knock-on effects to other commodity markets ©Rubric

Oil price: Brent spot and futures curve Fertiliser and aluminium prices

(USD per barrel) (lhs: USD/t; rhs: USD/mt) Urea US Gulf futures (lhs) Aluminium price (rhs) 650 3600 1000 4000 Spot Futures (latest) Futures (before Iran war) 600 3500 120 800 3500 550 3400110 500 3300100 600 3000 90 450 3200 80 400 3100 400 250070 350 3000 60 300 2900 200 200050 25/03/26 01/26 03/26 01/22 01/24 01/26 25/03/2609/25 04/26 11/26 06/27 31/12/2028

Sources: Refinitiv and ECB staff calculations. Sources: Bloomberg and LSEG. Notes: The chart shows the Brent oil spot price together with futures curves for before the Iran Notes: Urea (Granular) free on board (FOB) US Gulf Futures (left-hand side). London war (cutoff 27 February 2026) and the latest observation. Metal Exchange (LME) aluminium 99.7% cash price (right-hand scale).

Rising gas prices pose particular challenges to the euro area amid low gas storages ©Rubric

Gas price: spot and futures curve Gas storage utilisation rate

(EUR/MWh) (percent of total capacity) Range (2011 - today) 2025Spot Futures (latest) Futures (before Iran war) 2024 Average (2011 - today) 202670 100 60 80 50 60 40 40 30 20 20 09/25 05/26 01/27 09/27 31/12/2028 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Sources: Refinitiv and ECB staff calculations. Sources: Gas Infrastructure Europe and ECB staff calculations.Notes: The chart shows the TTF spot price together with futures curves for before the Iran war Latest observation: 25 March 2026 (1 day reporting lag).(cutoff 27 February 2026) and the latest observation.

Sharp upward revision in inflation expectations with medium-term risks tilted to upside ©Rubric

HICP inflation fixings (ex tobacco) Balance of risks to euro area inflation

(percentages per annum) (percentage points) Fixings HICPxT (latest) Fixings HICPxT (27 Feb 26) 2-year 5-year 5-year-in-5-year Realised HICPxT 1003.2 803.0 risk Upside 602.8 40 2.6 20 2.4 0 2.2 -20 2.0 -40 1.8 -60 1.6 -80 risk -100 Downside1.4 2022 2023 2024 2025 2026Jan-25 Jul-25 Jan-26 Jul-26 Jan-27 Jul-27

Sources: Bloomberg, LSEG and ECB calculations.Sources: Bloomberg, Eurostat and ECB calculations.Notes: As a synthetic market indicator of perceived risks to price stability, the balance of risks isNotes: Monthly inflation paths refer to inflation fixings, tied to HICP ex tobacco.defined as the difference between the risk-neutral probability assigned to average inflation being above and below 2% (see Garcia et al. 2024).

ECB’s expected policy rate path has shifted up and has become much more uncertain ©Rubric

Euribor-implied probability densities Realised and implied ECB deposit facility rate six months ahead(percentages) (percentages)

Latest Pre-Iran war Realised DFR Latest Pre-Iran war4.5 4.0 4.5 3.54.0 3.53.0 3.0 2.52.5 2.02.0 1.5 1.51.0 0.51.0 0.0 0.5-0.5 -1.00.0Jan-21 Jan-22 Jan-23 Jan-24 Jan-25 Jan-26 Jan-27 Jan-28 Jan-291.00 1.50 2.00 2.50 3.00 3.50 4.00

Sources: Bloomberg and ECB calculations.Sources: Bloomberg and ECB calculations. Notes: Market-implied expectations are inferred from pricing of meeting dated OIS contracts.Notes: Pre-Iran refers to 27 February 2026. Implied density of 3-month EURIBOR in 6 months' time on selected dates. Pre-Iran war corresponds to 27 February 2026.

Structural challenges from demographic ageing and climate change dampen growth ©Rubric

Potential GDP growth in the euro area Global GDP losses due to climate change: current policies vs net zero 2050 scenario(annual percentage changes and percentage point contributions)

(% of annual global GDP)Labour contribution Capital contribution TFP contributionCurrent PoliciesPotential growthNet Zero 20502.5

0Projection 2.0-2 1.5-4 -61.0 -80.5 -10 0.0 -12 2023 2025 2030 2035 2040 2045 2050-0.5 20022004200620082010201220142016201820202022202420262028203020322034 Sources: IIASA NGFS Climate Scenarios Database, NiGEM model with REMIND inputs (Phase VSource: European Commission Autumn 2025 Forecast. publication). Notes: The chart shows NGFS long-term scenarios. The euro area is most likely to be hit less severely than the global average, which is mainly since its national climate action plans are slightly more ambitious than most of the other countries, thus the additional transition risk weighs less strongly.

Given higher spending needs, fiscal sustainability requires higher potential growth ©Rubric

Defence spending Government interest expenditures

(share of GDP) (percent of GDP) 2024 difference 2024-2034Germany France Italy Spain EA (17 NATO Members) 4.0 8

73.5 63.0 52.5 4

2.0 3 1.5 2 1.0 1

00.5 -10.0FR IT BE SK FI LV AT ES GR DE LT SI PT HR EE NL MT LU IE CY2014 2016 2018 2020 2022 2024 2026 2028 Source: NATO.Source: ESCB DSA based on Autumn 2025 European Commission’s forecasts. Notes: 2025-2028 shows the flexibility under an activated national escape clause, which isNotes: The figures refer to a hypothetical no fiscal policy change scenario, where the structural 1.5% of GDP; if a Member State requests activation, the time profile of the increase of upprimary fiscal balance (i.e. excluding the cyclical impact of macroeconomic developments) remains to 1.5% of GDP is flexible over the four years. EA aggregate does not include the fourconstant at 2024 level except for the expected change in ageing cost. non-NATO euro area Member States AT, CY, IE and MT. Latest observation: preliminary 2025 data for France, Italy and Spain, 2024 for the rest.Reducing internal trade barriers would help exploit benefits from single market ©Rubric

Trade barriers and benefits from lowering themIntra-EU and extra-EU trade

(percentage of nominal GDP; (lhs: percentage points; rhs: percentage change in barriers and left panel: goods market, right panel: services market) intra-EU trade) Tariff equivalent rate (lhs)EU-27 Extra-EU Potential reduction in tariff equivalent rate (lhs)55 17 Trade effect (rhs) 100 20 1650 90 18 80 16 1545 70 14 1440 60 12 50 10 1335 40 8 1230 30 6 20 4 1125 10 2 1020 0 0 2013 2018 20232013 2018 2023 Goods Services

Source: Eurostat Sources: OECD TiVA 2025, Antràs and Chor (2018), ECB Economic Bulletin 8/2025 and ECB calculations. Notes: The tariff equivalent rates (yellow bars) are based on a gravity estimation and shows the ad-valorem tariff equivalent of intra-EU trade barriers. The potential reduction in tariff equivalent rates (red bars) reports the difference in estimated trade costs in the Single Market between the rest of the EU and the Netherlands (the country displaying the highest integration within the EU). Trade effect (blue bar) represents the percentage change effect of decreasing the trade costs/barriers by the amount in the red bars.•Diffusion and adoption of AI offers opportunities to significantly raise TFP ©Rubric

Range of estimated TFP impact of AIAI adoption rates of workers under different scenarios (% of all workers)

(% increase over 10 years)

2024 2025 5.0%60 4.5% 50 4.0% 3.5%40 3.0% 30 2.5% 2.0% 20 1.5% 1.0%10 0.5% 0 0.0%EL IT BE FR PT IE FI EA ES NL AT DE Historical adoption speed Adoption speed as other GPT Observed speed of adoption

Source: Consumer expectations survey (CES). Source: ECB calculations on CES data. Notes: The chart shows the percentage of workers replying with “Yes” to the following Notes: The blue bars indicate the range of estimates across scenarios reflecting different question: “Do you personally use artificial intelligence (including a large language model, such assumptions about the share of the economy exposed to AI, which may remain constant over time as ChatGPT or Gemini) in your work?”. Artificial intelligence refers to devices that can perform (at either a low or high level) or increase as AI capabilities improve.tasks that would usually require human intelligence. These can be software (including large language models), computers, robots or other hardware devices, possibly augmented with sensors or cameras, etc.Higher R&D in defence spending could significantly enhance impact on GDP growth ©Rubric

GDP growth impact of Cumulative public R&D Historical composition of crowding-in of private R&D multipliersdefence spending (2015-2023)

y-axis: percentage deviations from steady state; (% of total military spending) (y-axis: EUR of GDP increase per EUR of x-axis: years) public R&D invested; x-axis: years) Procurement Labour contributionResearch and development Capital contributionOperations and maintenance TFP contribution 3.0 GDP growthMilitary personnel0.5Other 2.5 0.4 2.0 0.3 1.5Euro area0.2 1.00.1 0.50.0 0.0-0.1 US -0.5-0.2 -1.0-0.3 -1.5-0.40% 20% 40% 60% 80% 100% 12345678910 12345678910

Sources: JANES and ECB staff calculations. Notes: The euro area figure is based on 18 countries, with no data Source: Eurosystem estimates. Source: Eurosystem estimates.available for Cyprus and Malta.

Strengthening autonomy requires reduction of dependencies in commodities and payment ©Rubric

Role of international card Share of energy consumption Critical raw materials schemes in card transactionsfrom renewables in EUsubject to export restrictions

(percent)(percent)(% of exports)

2022 2017 70

45% 32%6040% 35%50 30%

40 25% 68% 20%30 World average 2022 15%20 World average 2017 10% International card schemes10 5% National card schemes 0%0 2005 2010 2015 2020 2025 2030

Tin Zinc Lea d SilverNickelBo ron Silicon Cob altBary teIndium Iridium Cop per ArsenicLithiumGallium Osm iumFeldspar Niobium HafniumGraphite Titanium Platin um Rh odium Tungsten Selenium Fluorspar Beryllium TantalumTellurium Antimony Palladium ZirconiumStrontium Source: ECB. Vanadium Chromium Aluminium Ru then iu mRare earths ManganeseMagn esium Pho sphorusGermanium Molybdenum Notes: Share of international card schemes by volume in total Source: European Environment Agency. electronically initiated card payments with cards issued in the Notes: The dotted line presents a linear trajectory to the euro area and transactions acquired worldwide, i.e. in any non-Source: EBRD Transition Report 2023-24. minimum EU target for renewable sources of 42.5% by 2030. euro area country. Latest observation: 2024

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