Is the euro area facing a significant economic slowdown in 2026? in World Economy News 22/06/2026 The euro zone faces a sharp economic slowdown this year as a Middle East-driven energy shock weighs on growth, inflation and investment, according to a Deutsche Bank Research said in a recent note. The broker cut its 2026 euro area GDP growth forecast to 0.5% from 1.1% projected in its November World Outlook, citing higher energy costs, weaker global demand and tighter financial conditions. Deutsche Bank expects the euro area economy to contract 0.1% quarter-on-quarter in the second quarter, in line with current activity trackers, before stagnating in the third quarter and returning to modest growth in the final three months of the year. Growth is forecast to recover to 1.1% in 2027. “Before the energy shock, Europe’s macro outlook was a “two-economy problem”: domestic cyclical resilience in 2025, boosted by German fiscal spending in 2026, contrasted with a medium-term outlook clouded by weak competitiveness and lack of strategic autonomy,” the report said. The broker said the shock is being transmitted through four main channels: reduced household purchasing power from higher inflation, elevated uncertainty weighing on investment, tighter monetary policy and weaker exports due to slowing global demand. It estimates the euro area’s energy import bill will increase by around 1% of GDP in 2026. Headline inflation, measured by the Harmonised Index of Consumer Prices (HICP), is forecast to average 3.1% in 2026 and 2.5% in 2027, compared with pre-conflict expectations of 1.7% and 1.9%, respectively. Core inflation is projected at 2.4% in both years. In response, Deutsche Bank expects the European Central Bank to raise its deposit rate by a total of 50 basis points to 2.50% by September, through quarter-point increases in June and September. The broker described the expected move as “measured tightening.” Germany, the euro area’s largest economy, is forecast to grow 0.5% in 2