The economic impact of the Iran war is hitting Europe, where low growth and faster inflation risk deepening industrial, fiscal and political pressures in the region, Bloomberg reports.

President Donald Trump’s military campaign, the conclusion of which remains as unclear as when the first attacks were launched a month ago, is causing countries to reduce their economic forecasts, while they take measures to keep under control the increase in prices, caused by the increase in gas and oil prices.

The consequences for a continent that has just managed to overcome the effects of the conflict in Ukraine (which broke out in 2022) appear to be a return to previous policies, when support is provided to households and central banks raise interest rates. For companies, already affected by the lack of qualified employees, there is a danger of expanding the negative effects, given the decrease in personal incomes, according to Agerpres.

“It is very clear that the first and most affected are the energy-intensive sectors. But the longer it takes, the more the effect will be felt in every sector,” said Christian Keller, an analyst at Barclays.

With consumer confidence falling and gas and oil prices rising, Germany and Italy are among the countries considering reducing their economic forecasts, following the more gloomy outlook announced last week by the European Central Bank.

“The current shock is probably beyond what we imagine at the moment, and leads to a kind of delayed assessment of the severity of the crisis,” said ECB President Christine Lagarde.

Germany’s chemical industry, hit hard by the latest increase in energy costs in 2022, has warned that plants could reduce production following the effective closure of the Strait of Hormuz.

Germany’s largest ammonia producer, SKW Piesteritz GmbH, has reduced its operations to 85%, while specialty chemicals maker Evonik Industries is still assessing the difficulties it faces.

“It is still too early to quantify the exact effects. But Evonik will not be able to escape the indirect consequences of the conflict,” said CEO Christian Kullmann.

German shipping group Hapag-Lloyd AG is facing additional weekly costs of $40 million to $50 million for fuel, insurance and storage. The company is trying to recoup some of the costs through “emergency taxes,” CEO Rolf Habben Jansen said.

Such costs threaten to severely disrupt supply chains, making life more expensive for everyone. Consumers are taking notice: the share of households expecting faster price increases next year has risen “extremely strongly,” data from France’s National Institute of Statistics (Insee) showed.

British fashion company Next Plc warned that it could raise prices by 1.5% to 2% if the war lasts more than three months. Swedish retailer Hennes & Mauritz AB (H&M) warned that a prolonged conflict would have negative effects that would reduce consumption.

Spain published inflation figures on Friday – the first major European economy to report data for March – and the increase was higher than expected, although it did not exceed the ECB’s 2% target.

The change in fortunes in a region that until recently sought to recover its economy and keep inflation under control after last year’s trade turmoil could have consequences.

For the euro zone, the question is whether the conflict is acting as a stimulus or an impediment to reforms that would allow the bloc to stand on its own in a world where US support is eroding and competition from China is increasing. Financing the economic support measures is also a problem for many countries, with only Germany having significant fiscal space.

But France reduced its budget deficit more than expected last year, as economic growth exceeded forecasts, the National Statistics Institute said.

The euro zone’s second-largest economy is set to run a budget deficit of 5.1% of GDP in 2025, down from 5.8% of GDP in 2024 and above the government’s forecast of 5.4% of GDP.

The EU economy faces the risk of stagflation as a result of rising energy prices following the Iran war, European Economy Commissioner Valdis Dombrovskis said on Friday.

“The outlook is clouded by deep uncertainties, but it is clear that we face the risk of a stagflation shock, in other words, a situation where slower economic growth coincides with higher inflation,” Dombrovskis said after a meeting of European Union finance ministers on rising energy prices.

“This is also the case if the disruptions in energy supplies are short-lived. In such a scenario, our analysis suggests that the EU economy could grow by around 0.4 percentage points in 2026 compared to the autumn forecast, and inflation could be up to one percentage point higher,” the official warned.

The Commission forecast in November that EU GDP would grow by 1.4% in 2026 and 1.5% in 2027, while the euro area is expected to expand by 1.2% this year and 1.4% next year. Euro area inflation is expected to be 2% in 2026, in line with the ECB’s medium-term target.

Dombrovskis added that any response by the authorities would have an impact on budgets and warned that most EU member states have limited room for manoeuvre, following previous shocks and the need to increase defence spending.

A significant rise in inflation could force the European Central Bank (ECB) to raise interest rates, and traders have increased their bets that such a move will be decided this year. The ECB’s next monetary policy meeting is scheduled for March 19, but analysts do not expect a change at that time.