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Eurostat reported a 1.5 percent month-on-month decline in eurozone industrial production for January, well below expectations for 0.6 percent growth in a Reuters poll of economists. Year-on-year output contracted 1.2 percent against forecasts of 1.4 percent growth. Goldman Sachs has cut its 2026 growth forecast to 1 percent and expects headline inflation to peak at 2.9 percent in the second quarter. The stagflation scenario that Europe has been trying to avoid since 2022 is reassembling itself in real time.
What the Data Shows
The January figures, published by Eurostat on March 13, confirm that the eurozone’s brief industrial recovery in late 2025 has already reversed. Seasonally adjusted production fell 1.5 percent from December, following a revised 0.6 percent decline the previous month. The breadth of the contraction was severe: non-durable consumer goods dropped 6.0 percent, capital goods fell 2.3 percent, intermediate goods declined 1.9 percent, and durable consumer goods lost 1.9 percent. Energy output was the sole category to rise, gaining 4.7 percent, a figure that reflects higher gas-fired generation costs being passed through the system rather than genuine industrial strength.
On an annual basis, eurozone industrial production contracted 1.2 percent in January. That compares with revised year-on-year growth of 2.2 percent in December and 2.5 percent in November, per Eurostat. The swing from growth to contraction in the space of a single month is the kind of reversal that does not happen without a structural break. As Reuters reported, overall eurozone industrial output remains approximately 3 percent below its 2021 level. The sector has been, in aggregate terms, broadly stagnant for four years.
Among the largest declines by member state, Ireland fell 9.8 percent month-on-month, Luxembourg 4.3 percent, and Sweden 4.1 percent. Germany, the bloc’s industrial anchor, was not immune: Eurostat recorded a 2.9 percent monthly decline in December (the latest available national data), extending a downward trend that has persisted, with few interruptions, since late 2022. German industrial output, per Reuters, now sits 9 percent below its 2021 level, a figure that captures three years of compounding decline in what was, until recently, the manufacturing engine of the continent.
The Energy Variable
The January production data predates the worst of the current energy shock. The United States and Israel launched strikes against Iran on February 28. Brent crude has since risen above $100 per barrel for the first time since August 2022. Natural gas prices at the TTF benchmark, Europe’s primary reference, are up approximately 80 percent since the start of the year. Oil has climbed roughly two-thirds over the same period.
The Ember Climate research group, in an analysis published on March 18, calculated that the European Union paid an additional €2.5 billion for fossil fuel imports in the first ten days of the conflict alone. Power prices in Germany, the Netherlands, Italy, and Belgium reached their highest levels of 2026 in the first week of March. The pattern is uneven, however, and instructive. In Spain, where renewable penetration has structurally decoupled electricity prices from gas, gas influenced the price of power in only 15 percent of trading hours in 2026 so far. In Italy, the figure is 89 percent. Countries that moved fastest on renewables after the 2022 crisis are now paying the lowest premium for the 2026 one.
ING economist Bert Colijn captured the sentiment shift in a single line: “Manufacturing optimism in the eurozone is fading as industrial production falls to its lowest level since 2024, and the Middle East conflict has renewed output risks, especially for energy-intensive sectors.” S&P Global Market Intelligence’s Diego Iscaro echoed the assessment, noting that “Europe’s industrial sector is highly reliant on imported gas and oil, and is also exposed to supply-chain disruptions resulting from the conflict.”
The Forecasts
Goldman Sachs, in a note dated March 12, cut its eurozone growth forecast to 1.0 percent Q4/Q4 for 2026, down from its pre-conflict estimate. Headline inflation is now expected to peak at 2.9 percent in the second quarter, compared with 2.0 percent before the war. The European Central Bank policy forecast was left unchanged (the deposit facility rate remains at 2.00 percent following the February 5 hold), but Goldman pushed out the timing of Bank of England rate cuts, an indirect acknowledgement that the energy pass-through will constrain monetary easing across the continent.
For Germany specifically, Goldman projects 1.1 percent growth, with fiscal stimulus accounting for roughly half of that figure. That is notable: without the record €180 billion borrowing programme that Berlin approved in November, Europe’s largest economy would be growing at approximately 0.5 percent, barely above stall speed.
Vanguard senior economist Shaan Raithatha was more direct, warning that sharply higher energy prices risk “a significant stagflationary shock to the European economy” and that the ECB “may be forced to reassess its policy stance” if the increase persists or accelerates. The word “stagflation,” avoided by most institutional forecasters for the better part of two years, is returning to the lexicon.
The Sentiment Collapse
The ZEW Indicator of Economic Sentiment, published on March 17, underscored the speed at which the outlook has deteriorated. The index fell from 58.3 in February to minus 0.5 in March, a drop of 58.8 points. That is the third-largest monthly decline in the indicator’s history, exceeded only by the 93.6-point fall in March 2022 (Russia’s invasion of Ukraine) and the 65.6-point drop in April 2025 (Trump’s tariff announcement). ZEW President Achim Wambach stated that the indicator “has collapsed” and that financial market experts are “sceptical that it will come to a swift end.”
The eurozone-wide ZEW expectations index followed a similar trajectory, falling to minus 8.5 from 39.4, per Euronews. Approximately 80 percent of respondents expected inflationary pressure across Germany and the eurozone. The contrast between the forward-looking sentiment data and the backward-looking investment commitments is the central paradox of European macro at this moment. The assessment of current conditions, interestingly, improved slightly, with the index climbing 3.0 points to minus 62.9, suggesting that the damage has not yet materialised in hard data, though the February and March production figures, once published, are expected to close that gap.
The Structural Divide
The uneven distribution of the energy shock across the eurozone matters for policy. Southern European economies with high renewable penetration (Spain, Portugal) and the Nordic countries are structurally better insulated than the industrial core (Germany, Italy, Belgium, the Netherlands). The IMF’s Alfred Kammer, speaking at HEC Paris on March 11, noted that “despite having the people, the technology, and the savings to grow faster, Europe appears to be settling into a path of slow and mediocre medium-term growth.” The productivity gap with the United States continues to widen. Among companies founded in the last 50 years, American firms overwhelmingly dominate global market capitalisation. Europe produces fewer globally competitive firms at comparable scale.
Coface, the French credit insurer, projects global business insolvencies to rise a further 3 to 4 percent in 2026, with France alone expected to record approximately 69,000 failures, exceeding its 2009 record. European profit margins in manufacturing, particularly in Germany, have contracted by 5 percentage points over three years, squeezed by Chinese overcapacity in sectors ranging from steel to electric vehicles.
The central bank response remains constrained. The ECB held rates on February 5 and has offered no forward guidance that accounts for the energy shock. The Federal Reserve, meeting today, faces a parallel dilemma with oil-driven inflation but from a position of relative economic strength. The ECB does not have that luxury. Eurozone Q4 2025 GDP grew just 0.2 percent quarter-on-quarter, per Eurostat. Unemployment, at 6.1 percent in January (down from 6.2 percent in December), provides the only genuinely positive signal in the current dataset.
The Implication
Europe is now confronting a familiar and deeply uncomfortable configuration: rising energy costs, declining industrial output, sticky services inflation, and a central bank with limited room to act. The difference between 2026 and 2022 is that policymakers have already spent many of their fiscal reserves, energy diversification is only partially complete, and the geopolitical shock is originating from a conflict in which European governments have marginal diplomatic leverage. The fiscal firepower exists in Germany. It does not exist, at comparable scale, in France, Italy, or Spain. The ECB will likely find itself caught between two mandates that, for the first time since the sovereign debt crisis, are pulling in opposite directions. The industrial production data for February and March, when the full force of the oil shock enters the supply chain, will determine whether this is a temporary disruption or the beginning of a structural downgrade for the eurozone’s growth trajectory.
For a complete timeline of how the Iran war reshaped global markets, see our reference page.
