Energy shocks impact growth. Can the Eurozone avoid a recession?

Investing.com — Bank of America Global Research said that although the eurozone is expected to avoid a recession despite a severe energy shock, growth will remain weak as rising oil and gas prices put pressure on economic activity and delay the decline in inflation.

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The bank cut its forecast for the eurozone’s growth this year to 0.6%, and to 1.0% next year, calling this outlook a “major shock.” It said the move was driven mainly by energy prices, while also stating that “a technical recession has been avoided,” but that the “recovery will be slower.”

Energy assumptions form the basis for this downgrade. Brent crude is expected to stay around $100 per barrel through the end of 2026, and Dutch TTF natural gas prices are expected to hold near €80 before next winter.

The report noted that “some permanent damage to energy supply will prevent global energy prices from quickly reverting,” and that even if geopolitical tensions ease, the economy will still face pressure.

The growth outlook reflects a cumulative loss of 90 basis points compared with earlier forecasts. It is expected that household behavior will cushion the initial impact: “consumers will buffer the initial shock in the second quarter of 2026 by lowering the savings rate.” At the same time, fiscal support remains limited, with discretionary measures accounting for about 0.2%–0.3% of GDP.

Despite avoiding a recession, output is expected to remain below pre-shock levels. “A sustained growth recovery starting from the fourth quarter of 2026 may be rather slow,” indicating ongoing weakness.

Inflation is expected to rise to 3.3% this year, then fall to 2.1% next year, with oil driving a rapid increase and natural gas prices adding persistence.

The report said that “the timing of when inflation falls below the target has been pushed back.” It expects overall inflation to drop below 2% only in the second half of 2027, while core inflation will not fall until the end of that year.

The ECB is expected to respond in the near term with a more restrictive policy. Bank of America forecasts rate hikes of 25 basis points in June and July 2026, taking the deposit rate to 2.50%, followed by rate cuts starting in June 2027. The report said the “ECB is feeling tense,” reflecting concerns about inflation risks.

Developments at the country level highlight an uneven exposure to the shock. Germany is seen as the “most vulnerable country,” with its growth forecast cut to 0.3% this year, while Italy’s forecast is 0.2%, reflecting higher sensitivity to energy.

France and Spain are expected to perform better, supported by their energy mix and policy measures, though both countries face slowing growth and rising inflation.

The baseline scenario assumes the shock is limited to prices, with no supply shortages. However, the report warns that a stronger energy shock could change the outlook, adding that higher oil and gas prices “would put the eurozone into a recession.”

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