The risk of stagflation in the Eurozone is becoming more pronounced. On Thursday, the International Monetary Fund released its latest economic assessment. Due to energy shocks stemming from the Middle East situation, the institution has lowered its growth forecasts for the Eurozone while raising its inflation outlook, warning of risks that the regional economy could weaken further. The report also anticipates that the European Central Bank will likely continue its pace of interest rate hikes and provides clear guidance on fiscal support policies for the Eurozone, which is currently caught in the dual challenges of slowing growth and persistently high prices.

Economic Outlook Dims, Growth and Inflation Expectations Adjusted

The IMF issued a routine economic report covering the 21 member states of the Eurozone, formally revising its previous economic data projections.

The report indicates that, hampered by changes in the external environment, the Eurozone's economic growth rate for this year is now projected at 0.9%, a further reduction from the 1.1% forecast in April. This marks the second time this year the institution has lowered its regional growth forecast. Regarding inflation, the overall inflation rate for this year is expected to rise to 2.8%, higher than the previous estimate of 2.6%, indicating significantly increased upward pressure on prices.

The IMF stated that the Eurozone previously achieved a period where economic growth was close to its potential level and inflation was on target. However, the overall development prospects have now clearly weakened. The report characterizes the Middle East situation as a profound but short-term negative supply-side shock, which is identified as the core factor causing the deterioration in regional economic indicators.

Multiple Risks Converge, Expanding Downside Economic Hazards

The report further issues risk warnings regarding the future situation.

The IMF believes that if the tense state of the energy market persists, it will not only continue to push up price levels and entrench market expectations of high inflation but will also dampen business and consumer confidence, thereby suppressing overall demand. Beyond the energy crisis, several other risks threaten the Eurozone economy in the future. Further escalation in the Middle East, delays in repairing energy infrastructure, shifts in the Russia-Ukraine conflict, and adjustments in global trade policies could all impose additional downward pressure on the regional economy, with the overall situation potentially continuing to deteriorate.

Analyzing monetary policy developments, the IMF notes that the European Central Bank initiated its first interest rate hike in nearly three years on Thursday and is highly likely to continue tightening policy thereafter. According to calculations, the cumulative interest rate hikes by the ECB by 2026 could reach 50 basis points, with the possibility of a third rate hike not ruled out. The central bank is expected to use sustained rate increases to tackle persistent inflation.

Fiscal Policy Guidance: Avoiding Broad-Based Subsidy Support

On fiscal response strategies, the IMF has also provided clear recommendations to Eurozone finance ministers. The institution explicitly advises that, in the face of high energy prices, member states need not implement universal, large-scale fiscal subsidy policies. Data shows that, as of May 2026, the overall scale of support measures introduced by EU countries to counter energy pressures, when converted, accounts for approximately 0.1% of the region's GDP.

The IMF cautions that even if the current scale of subsidies is relatively limited, broad-based universal support could weaken market incentives for energy conservation and efficiency, which is detrimental to long-term healthy economic development. When formulating relevant policies in the future, countries should precisely target vulnerable groups, directing fiscal resources specifically to protect low-income and disadvantaged households, ensuring targeted assistance and acting within their means.

Overall, the energy shock has plunged the Eurozone into stagflation concerns, forcing monetary policy to remain persistently tight, while fiscal policy also needs to exercise restraint. Against the backdrop of intertwined multiple internal and external risks, the Eurozone will still face significant challenges in balancing economic growth with price stability.