The International Monetary Fund lowered its forecasts for eurozone economic growth in 2026, warning that the war in the Middle East has become one of the most prominent risks threatening economic activity, through disruption of energy supplies, tightening of financial conditions, and rising inflationary pressures.

This came after the Fund's Executive Board concluded its annual consultations on common economic policies for eurozone countries, where it cut its growth forecast to 0.9 percent in 2026, compared to 1.4 percent in 2025, with a partial recovery to 1.2 percent in 2027.

The Fund also raised its inflation forecast to 2.9 percent in 2026, compared to 2.1 percent in 2025, before falling to 2.3 percent the following year.

It noted that these forecasts represent a downward revision of 0.5 percentage points for growth in 2026 and 0.2 percentage points in 2027, compared to pre-war estimates.

The Fund explained that the downgrade is due to a range of factors, most notably declining business and consumer confidence, tightening financial conditions, in addition to rising inflationary pressures resulting from the war in the Middle East.

It stressed that energy security has become the biggest source of risk facing the eurozone economy, warning that any delay in restoring global energy supplies could simultaneously slow growth and raise inflation rates.

It added that risks are not limited to the war in the Middle East, but also include the possibility of renewed volatility in financial markets, the ongoing war in Ukraine, and uncertainty surrounding tariffs and trade policies.

The Fund also warned of increasing risks to financial stability, noting that a sudden wave of investor risk aversion, or the transmission of pressures from highly indebted non-bank financial institutions, could spread to banks and core funding markets.

The Executive Board called on central banks to adopt a cautious approach based on economic data when making monetary policy decisions, prioritizing the preservation of stable inflation expectations.

On fiscal policy, the Fund recommended that governments rely on automatic stabilizers rather than launching new spending programs, stressing that any additional support should be temporary and precisely targeted, without distorting market mechanisms.

It also called on highly indebted European countries to commit to credible plans to consolidate public finances over the medium term, through expenditure-side reforms and full compliance with EU fiscal rules.

On the structural side, the Fund stressed that economic reforms remain essential for enhancing the eurozone's long-term competitiveness, calling for deepening the integration of the single European market, removing barriers to cross-border activity, enhancing labor mobility, preparing for the adoption of artificial intelligence applications, in addition to strengthening energy security through greater market integration.

The Fund also supported continued work on the Savings and Investment Union, the development of the digital euro project, strengthening the EU budget to finance common priorities, as well as diversifying trade partnerships while maintaining an open, rules-based global trading system.

Regarding the banking sector, the IMF described the eurozone financial system as still generally sound, but called for tightening stress tests, enhancing oversight of non-bank financial institutions, completing the European Banking Union project, fully implementing Basel III standards, while intensifying oversight of stablecoins and strengthening cross-border regulatory cooperation.