Goldman Sachs Cuts EU GDP Forecast Amid Iran Conflict

Goldman Sachs Slashes 2026 Euro Area GDP Growth to 0.7%

Goldman Sachs has significantly downgraded its growth forecast for the Euro area, projecting a 4Q/4Q 2026 GDP growth of 0.7%, a sharp decline from the previous 1.4% estimate. The revision comes as a direct consequence of the ongoing conflict with Iran, which has severely impacted global energy supplies.

Oil Disruption and Inflationary Pressures Drive Downgrade

The primary driver for the downgrade is the disruption of oil flows through the Strait of Hormuz, which are currently at just 6% of normal levels. This has kept Brent crude prices sustained at or above $100 per barrel. Consequently, Goldman Sachs has raised its inflation outlook, with headline inflation now expected to peak at 3.2% in the second quarter. Economic indicators are reflecting this pressure, as the Euro area composite PMI dropped to 50.5 in March, and composite input prices reached their highest level in over three years.

Capital Outflows and Shifting Investor Sentiment

The economic headwinds have triggered a reversal in capital flows. European equities experienced net outflows this week, ending a period of strong buying from both domestic and foreign investors. Domestic investors have turned from net buyers to net sellers due to surging energy prices and higher borrowing costs. Foreign investors, who had been consistent buyers since early 2025, halted their purchasing as the conflict continued and global growth forecasts were revised downward.

Outlook: ECB Rate Hikes and Lingering Uncertainty

In response to rising inflation, the European Central Bank is expected to implement two 25-basis-point rate hikes in April and June. However, Goldman Sachs anticipates these increases will be reversed in 2027 as inflation subsides and the economy weakens. The market's future direction remains uncertain, heavily dependent on the resolution of the conflict and the stabilization of energy prices.

FAQ

Q: Why did Goldman Sachs cut the EU GDP forecast?
A: The forecast was cut due to severe oil flow disruptions from the Iran conflict, which has pushed Brent crude prices above $100 per barrel and damaged LNG production infrastructure.

Q: What is the new GDP growth forecast for the Euro area?
A: The 4Q/4Q 2026 GDP growth forecast is now 0.7%, revised down from a previous estimate of 1.4%.

Q: How has the conflict impacted investment in Europe?
A: It has caused a reversal in fund flows, leading to net outflows from European equities as both foreign and domestic investors have become net sellers.

Source: Investing.com