The ECB remains concerned about an energy shock in the Strait of Hormuz

Economic growth in the Eurozone will be modest in the short term, and the outlook also remains uncertain for as long as the situation in the Middle East continues to cause such volatility in energy prices. This, in summary, is the ECB’s forecast as set out in its July economic bulletin, published yesterday. Whilst relative calm is returning to the stock markets following the announcement of an impending agreement between the United States and Iran, the real economy is much slower to react and, indeed, according to the ECB, has not yet fully felt the effects of the blockade of the Strait of Hormuz. In other words, to assess the impact of Trump’s foreign policy on Europe, we will have to wait a few more months – until the end of this year and the first half of 2027. Indeed, according to economists at the Eurotower, inflation will remain “well above 2 per cent” at least until June 2027, whilst “downside risks” are weighing on the growth outlook.

The fragility of the geopolitical situation is a cause for concern, despite efforts to find a way out. The main risk is that further disruptions to energy supplies could keep energy prices high, weighing on real incomes, consumption and investment. A deterioration in market confidence, tighter credit conditions and increased trade friction could, moreover, weaken demand, exports and supply chains. The reason why the full effects of the Hormuz blockade have not yet been felt on the European economy is that businesses continue to incur higher costs to source supplies and therefore plan to increase their selling prices. Thus, it is only over a longer period that the full impact of the energy shock – which is also set to influence monetary policy – will become apparent. On this front, however, the ECB, unlike the Fed where deep divisions are emerging, appears, on the whole, united in its resolve to act to combat rising inflation, even though it intends to wait for the next set of data before deciding whether there will be a further rate rise following June’s increase.