Rabobank strategists say the Iran war is pushing the Eurozone towards stagflation, with higher inflation and weaker GDP. They expect inflation to stay above pre-war forecasts through 2027, while growth slows sharply in 2026 and recovers only modestly in 2027, even with government support.
As a net energy importer, the Eurozone is exposed to rising energy prices, which worsen the terms of trade. Higher prices can reduce consumption and investment by cutting real incomes, squeezing margins, and weakening confidence, while support measures add pressure to public finances.
Higher risk and inflation premia, plus expectations of policy rate rises, have lifted long-term rates and may limit investment. Rabobank assumes one rate rise this year, while markets price two, and the 10-year EUR swap rate is up about 30 basis points since end-February.
Using current energy price forecasts, inflation is expected to average 3.1% in 2026 and 2.5% in 2027, with cumulative inflation 1.7 percentage points higher than previously forecast. Growth is projected at 1.5% in 2025, 0.6% this year, and 0.9% next year.
Rabobank says a milder outcome based on faster reopening of the Strait and energy flows is now unlikely, while a worse outcome remains possible. It notes risks such as demand destruction, de-industrialisation, and wider credit and sovereign risk premia.
We are now facing a stagflationary shock in the Eurozone, driven by the ongoing conflict in the Gulf. As a major energy importer, the bloc is directly exposed to higher energy prices, with Brent crude futures now holding above $115 a barrel, a level not seen in nearly two years. This is simultaneously pushing up inflation forecasts while putting a brake on economic growth by hitting consumer pockets and business investment.
The latest March inflation data from Eurostat registered a surprise jump to 3.4%, fueling expectations that inflation will average over 3% for 2026. This puts the European Central Bank in a difficult position, reminiscent of the rate hike cycle of 2022, as it may be forced to raise rates into a weakening economy. Consequently, traders should consider positioning for higher interest rates, which could involve paying fixed on interest rate swaps or shorting German Bund futures.
The economic growth outlook has soured considerably, with GDP forecasts for this year being revised down to just 0.6% from the healthier 1.5% growth we saw in 2025. This downturn is confirmed by the latest German IFO Business Climate index, which saw its sharpest monthly fall since the energy crisis of the early 2020s. This weak growth outlook suggests that short positions or buying protective put options on broad European equity indices like the Euro Stoxx 50 could be a wise strategy.
Uncertainty remains extremely high, with the risk of a more severe scenario still very present. The VSTOXX, which measures Eurozone equity market volatility, has been stubbornly elevated around the 28 level, indicating significant market anxiety. Given the potential for widening credit and sovereign risk premiums, a situation not unlike the 2011 crisis, purchasing options to hedge against sudden, non-linear market declines is a crucial consideration for the weeks ahead.
