EU Economy: Weekly Commentary – March 9, 2026

European Market Review

Eurozone bond yields rose, long-term inflation remained stable at 1.92%. European stocks fell, Spain down over 7%. Euro weakened. Brent crude surged 27.47% after Strait of Hormuz closure.

Eurozone bond yields rose sharply during the week, yet long-term inflation expectations remained largely stable despite the escalation in the Middle East. In Germany, the 10-year breakeven inflation rate edged up only to 1.92%, still below the 2% threshold and well under the roughly 3% levels seen after Russia’s invasion of Ukraine, suggesting that markets do not currently expect lasting inflationary pressures from the conflict. European equity indices declined across the board. Spain led the losses with a drop of more than 7%. The euro depreciated 1.68% against the US dollar, reaching its lowest level since July 2025, reflecting the perception that Europe could be more economically exposed to Iran’s escalation. Meanwhile, Brent crude surged 27.47% after the conflict in the Persian Gulf effectively closed the Strait of Hormuz, one of the world’s most critical oil shipping routes, halting numerous tankers and removing an estimated 7 to 11 million barrels per day from global markets, intensifying concerns about a potential supply shortage amid uncertainty over when the route might reopen.

Europe View Synopsis

Eurozone inflation rose to 1.9% in February, driven by services and food; Middle East energy risks persist. Growth accelerated, costs surged, keeping the ECB cautious on rates.

Eurozone inflation showed renewed upward pressure in February, with headline inflation rising to 1.9% from 1.7% and core inflation increasing to 2.4% from 2.2%. The rise occurred despite a 3.2% drop in energy prices, driven mainly by stronger increases in services (3.4%) and food, alcohol, and tobacco (2.6%), while goods inflation remained modest at 0.7%. Persistent demand and supply dynamics indicate underlying inflationary pressures had not fully eased even before new geopolitical risks emerged. Ongoing Middle East tensions now pose a significant upside risk, particularly through potential disruptions in LNG supplies, which the Eurozone increasingly relies on. A prolonged conflict could push inflation back into the mid-2% range and heighten economic uncertainty. Meanwhile, business activity improved, with the Composite PMI rising to 51.9. Germany led growth, while France stagnated. However, input costs reached a 34-month high. Given rising cost pressures and moderate expansion, the ECB is expected to keep interest rates unchanged in the near term.

Inflation

Eurozone inflation increased to 1.9% in February, with core at 2.4%. Middle East energy tensions pose upside risk. ECB stays cautious, balancing uncertainty and neutral policy.

Eurozone inflation is showing renewed upward pressure, with February’s HICP data revealing core inflation climbed to 2.4% from 2.2% and headline inflation rose to 1.9% from January’s 1.7%, despite a 3.2% decline in energy prices, with the increase driven by stronger price growth in services (+3.4%) and food, alcohol, and tobacco (+2.6%), while other goods rose modestly (+0.7%). Even before the outbreak of the Middle East conflict, inflationary pressures had not fully eased, highlighting the persistence of underlying demand and supply-driven price dynamics. The ongoing conflict now represents a material upside risk to the Eurozone inflation outlook, as energy supply disruptions, particularly in LNG on which the region has become increasingly dependent, could drive further price volatility. If the conflict continues for several weeks, inflation could rebound into the mid-2% range, while a prolonged disruption could exert more pronounced effects on both inflation and economic growth, reviving uncertainty after a period of relative stability around the ECB’s target. ECB Chief Economist Philip Lane has warned that renewed inflationary spikes remain possible, underscoring the central bank’s readiness to respond, although with current inflation still below pre-pandemic peaks and monetary policy at neutral levels, the ECB is likely to calibrate interventions carefully, weighing the uncertain duration and impact of the conflict on energy markets and the broader economy.

We expect Eurozone inflation to rise further due to Middle East energy disruptions. The ECB is likely to maintain rates, avoiding cuts despite ongoing uncertainty.

Business Activity

Eurozone growth accelerated in February. Composite and services PMI rose to 51.9. Germany led at 53.2. France stagnated at 49.9. Input costs hit 34-month high.

Eurozone growth accelerated in February as private sector activity expanded at its fastest pace in three months, according to the Eurozone Composite PMI survey. The seasonally adjusted Composite Output Index rose to 51.9 from 51.3 in January, marking a three-month high, while the Services PMI Business Activity Index also increased to 51.9 from 51.6, a two-month peak. Sector-level data showed broad-based gains, with manufacturing output and services activity rising at quicker rates, though France saw a near-stagnation reading of 49.9. Germany led the region with a 53.2 reading, its strongest upturn in four months, followed by Ireland at 52.5, Italy at 52.1, and Spain at 51.5. New orders grew modestly but faster than in January, extending a seven-month run of sales improvements, while backlogs of work continued to decline and employment remained broadly unchanged. Input price inflation accelerated to its highest level in 34 months, and output charges increased at the second-steepest rate in a year. Firms’ expectations for growth over the next 12 months reached their most bullish levels since May 2024, particularly in manufacturing, underscoring optimism despite uneven sectoral momentum.

We expect the data to support the view that the European Central Bank is unlikely to cut interest rates in the near term, as cost pressures remain elevated amid sustained, though uneven, economic expansion across the Eurozone.