Iran War Triggers Energy Shock that Deepens Eurozone Recession Risks

The war in Iran has curtailed shipping through the Strait of Hormuz, a vital artery for global oil supplies. Senior executives at Equinor warned that a continued disruption for “another one to three months” could create a “critical shortfall in gas stocks.” Data from Gas Infrastructure Europe show European gas caverns and tanks at just above 35 % capacity, well below the seasonal norm of roughly 50 %. The resulting spike in fuel prices is feeding through to households and businesses across the continent.

France 24

A S&P Global Flash Euro Zone Composite Purchasing Managers’ Index fell to 47.5 in May, its lowest level since October 2023 and below the Reuters poll forecast of no change. The services PMI dropped to 46.4, the sharpest decline since February 2021, while Germany’s private-sector PMI contracted for a second month and France’s headline PMI fell to its lowest in five-and-a-half years. New orders across the private sector fell at the fastest pace in 18 months, and export orders declined at the steepest rate since January 2025.

France 24

Input-price inflation accelerated to a three-and-a-half-year high, and prices charged to customers rose at the fastest pace in 38 months. S&P Global warned that price gauges point to inflation “running close to 4 % in coming months,” whereas official Eurozone data recorded 3.0 % inflation in April, still above the European Central Bank’s 2 % target. The labour market also weakened: eurozone firms cut headcount for a fifth consecutive month, with job losses the steepest since November 2020 and the largest since August 2013 when the pandemic is excluded.

Reuters

In France, Budget Minister David Amiel announced an additional €710 million in aid, bringing total support for higher fuel prices to almost €1.2 billion. Prime Minister Sébastien Lecornu rejected a broader fuel-tax cut, insisting that assistance remain “targeted at those most in need.” The European Commission revised its outlook, now forecasting eurozone output growth of 0.9 % in 2026 (down from 1.3 % projected for 2025) and a modest rise of 1.2 % in 2027. Economy Commissioner Valdis Dombrovskis cautioned that if energy prices do not peak until late 2026, the forecasts could be halved. The European Central Bank left rates unchanged in its latest meeting but markets anticipate a 25-basis-point hike in June; Capital Economics’ Andrew Kenningham warned that “nothing here” would deter the increase.

France 24

Analysts at S&P Global project inflation near 4 % in the coming months, yet official Eurozone figures show inflation at 3.0 % in April, highlighting a forecasting gap. Additionally, the PMI forecast predicted stability from April to May, but the composite index fell to 47.5, underscoring uncertainty in business-activity expectations. Data on the duration of gas-stock shortfalls and the precise pass-through of fuel-price shocks to household inflation remain incomplete.

France 24

• “This is the weakest level since late 2023 and, at face value, signals that the economy has been stagnating in May,” — JP Morgan analysts

Reuters

• “There is nothing here to put the ECB Governing Council off its plans to raise rates by 25 basis points in June, nor anything to ease concerns about the risks of a recession,” — Andrew Kenningham, Capital Economics

Reuters

• “61 million) will be introduced ?to help people and businesses deal with the effects of the war in ?Iran on fuel prices.” — David Amiel, French Budget Minister

France 24

The ECB’s pending June rate hike will test the balance between curbing inflation and avoiding a deeper recession. Meanwhile, low gas inventories and the risk of prolonged Strait-of-Hormuz disruptions keep energy-price volatility high, suggesting that Europe’s cost-of-living pressures and growth slowdown may persist through the remainder of 2026.

France 24