Eurozone Economy Shrinks as Iran War Blocks Key Oil Route

The eurozone economy contracted by 0.2 percent in the first quarter of 2026, according to data from Eurostat, the EU's statistical office, marking a sharp reversal from the 0.2 percent growth recorded in the previous quarter. The downturn has been driven primarily by the Iran war, which erupted in February following joint US-Israeli strikes in the region and has severely disrupted European energy supplies through the blockade of the Strait of Hormuz, a critical chokepoint that handles roughly 20 percent of global oil shipments. Oil prices surged to around $104 per barrel in the immediate aftermath of the strikes and have remained elevated, contributing to a rise in eurozone inflation that reached 3 percent in April, up from 1.9 percent in February. The contraction has exposed significant divergences across the bloc. Ireland's economy plummeted 12.1 percent quarter-on-quarter, though economists caution this figure is heavily distorted by multinational corporations in the pharmaceutical sector that front-loaded shipments ahead of tariff deadlines. Excluding Ireland, the picture is less alarming: Germany expanded by 0.3 percent after two years of underperformance, Italy grew 0.3 percent, and Spain led the major economies with 0.6 percent growth. France, however, contracted by 0.1 percent. Net trade cut 0.3 percentage points from overall growth while weaker investment subtracted a further 0.1 percentage points, and the unemployment rate edged up to 6.3 percent in April from 6.2 percent the previous month. The European Central Bank now faces a difficult policy dilemma ahead of its June 11 meeting, with markets pricing in a near-certain 25 basis point rate hike to 2.25 percent to combat inflation. A Bloomberg survey of economists pointed to two rate increases this year, in June and September, but the GDP contraction data complicates that outlook. The combination of stagnant growth and rising prices has raised the risk of stagflation as the bloc's central economic threat, forcing the ECB to carefully weigh the danger of cooling activity further against the need to prevent runaway inflation that could erode purchasing power for households and businesses already struggling to recover from the pandemic-era crises.