PMI Data Shows Oil Shock Dampening Eurozone Purchasing Power

The core driver of the current economic shock is a sharp surge in energy costs. Since the start of hostilities, oil prices have increased to USD 89/BL, marking a 47% rise since the beginning of the year. This has been matched by a 63% increase in European natural gas prices, which have spiked to €51/MWh.

This direct hit to input costs has forced a revision to inflation forecasts. The shock has been significant enough to raise the Eurozone's 2026 headline inflation forecast by 0.7 percentage points. For a region highly dependent on energy imports, this flow of higher costs is a primary source of near-term inflationary pressure.

The immediate impact is already visible in manufacturing data. The latest PMI shows input costs have surged to a 38-month high, with manufacturers passing those pressures to consumers at the fastest pace in over a year. This confirms that the energy price shock is translating directly into higher prices across the economy.

The Growth Impact: A Dampening of Purchasing Power

The baseline staff projections now explicitly factor in a short-term dampening of economic activity. They foresee a pick-up in inflation, which will dampen purchasing power, consumer spending and, hence, GDP growth in the near term. This is the direct flow-through from the energy shock: as households and businesses pay more for fuel and power, less money is left for other goods and investment.

The monetary policy headwind is now evident. The ECB has signaled it is ready to raise rates if high energy prices cause a jump in inflation. Such a move would further squeeze borrowing costs and spending, compounding the pressure from higher prices. The market is pricing in this risk, with money markets now expecting three ECB rate increases this year.

The immediate market reaction confirms the shift in sentiment. European equity markets have fallen, with the Stoxx 600 index falling as all sectors declined. Oil-sensitive industrial stocks led the losses, reflecting investor concerns that the energy shock will directly hit corporate margins and consumer demand.

The Forward Flow: Scenarios and Catalysts

The central scenario assumes tensions will last a limited period, with energy prices peaking in the second quarter before declining. Baseline projections suggest quarterly average oil and gas prices will peak at around USD 90 per barrel and €50 per MWh respectively in the second quarter of 2026 and then ease. This path would make the shock more inflationary than recessionary, with the economy facing a temporary dampening of growth before a gradual recovery.

The primary risk is a prolonged closure of the Strait of Hormuz, which could make the energy price shock more permanent. If the strait remains blocked, it could trigger a normalization period of between three and six months for global energy markets, keeping costs elevated and deepening the economic impact on fuel-intensive industries. This scenario would likely force a more significant and lasting revision to growth forecasts.

The key catalysts for price normalization are political developments in the Middle East. Watch for any de-escalation in the conflict or a U.S. military action to reopen the Strait of Hormuz. As noted, if the U.S. can take control of the Strait, it would be positive for risk sentiment. Until then, energy prices and the associated economic pressures will remain highly sensitive to daily geopolitical news.