Goldman Sachs tracks the impact of the Middle East conflict on Europe: growth downgraded and inflation upgraded, but sentiment and financial conditions have improved marginally

Overview

This is a Goldman Sachs macro tracking report on the European economy, focused on assessing the impact of the Iran-related Middle East conflict on Europe. The report examines energy prices, financial conditions, consumer and investor sentiment, and the transmission to growth and inflation forecasts, comparing the responses of key macro variables with those in March 2022.

Core views

The report's core view is cautious: the conflict has pushed up energy forwards, refined petroleum product prices, and electricity prices, weighing on European growth and raising inflation expectations. At the same time, recent improvements in consumer confidence, investor sentiment, and the GS FCI indicate some cushion from financial conditions and sentiment, but not enough to offset the negative revisions to 2026 growth and inflation forecasts.

Analysis framework

The report applies a high-frequency macro tracking framework that combines daily data, proprietary Goldman Sachs tools, the GS Financial Conditions Index, daily consumer sentiment indicators, and a high-frequency growth model that incorporates energy prices, financial conditions, and overseas growth to monitor changes in European macro variables following the conflict shock.

Methodology notes

• High-frequency macro trackingGS Financial Conditions Index

  Financial Conditions Index

  Used to measure changes in Euro Area financial conditions. The report notes that the Euro Area GSFCI has eased close to pre-war levels, providing some cushion against the growth shock.

• Macro forecasting modelhigher-frequency growth model

  High-frequency growth model

  The model jointly considers energy prices, financial conditions, and overseas growth to estimate the impact of the Middle East conflict on European GDP growth and inflation forecasts.

• Event shock comparisonMarch 2022 comparison

  Historical shock comparison

  The report compares the responses of key current macro variables with their changes in March 2022 to assess the relative intensity of the latest shock.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• European macro assets

  Directly affected by energy prices, financial conditions, and growth expectations

  Strengths

  Financial conditions have eased recently, while consumer and investor sentiment have improved somewhat.

  Weaknesses

  GDP growth forecasts have been downgraded and inflation forecasts upgraded, creating stagflationary pressure for the macro portfolio.

  Comparison

  The report compares the current shock with changes in key macro variables in March 2022.

  Risks

  Another rise in energy prices, conflict escalation, greater inflation persistence, and renewed tightening of financial conditions.

• Energy-related commodities and electricity prices

  The Middle East conflict affects European inflation and growth through energy forwards, refined petroleum products, and electricity prices

  Strengths

  Energy-related assets may be supported by a supply-risk premium.

  Weaknesses

  High energy prices will weigh on European consumption, corporate costs, and growth momentum.

  Comparison

  The report notes that energy forwards have risen and refined petroleum product and electricity prices have rebounded.

  Risks

  Sharp price volatility; if the conflict eases or supply pressures decline, the risk premium may retreat.

Key data

• Adjustment to Euro Area 2026 GDP growth forecastDowngraded by approximately 0.7 percentage pointsFrom the report chart title: We Have Downgraded GDP Growth in 2026 by Around 0.7pp in the Euro Area.
• Adjustment to Euro Area end-2026 inflation forecastRaised by approximately 1.75 percentage pointsFrom the report chart title: We Have Raised Our End-2026 Inflation Forecast By Around 1.75pp in the Euro Area.
• Adjustment to UK end-2026 inflation forecastRaised by approximately 1.25 percentage pointsFrom the report chart title: and 1.25pp in the UK.
• Model update time2026-06-30 18:00 London timeThe report states that the model was updated as of 6:00 p.m. London time on June 30.
• Consumer confidenceEdged up in JuneFrom the chart title: Consumer Confidence Edged up in June.
• Financial conditionsEuro Area GSFCI eased close to pre-war levelsFrom the chart title: Euro Area GSFCIs Have Eased Close to the Pre-War Levels.

Impact & implications

For investment implications, European assets face combined pressure from downgraded growth and upgraded inflation forecasts, with energy prices remaining a key transmission variable. If financial conditions continue to ease and consumer and investor sentiment continue to improve, the macro shock may be partially cushioned. Conversely, if energy prices rise further or the conflict escalates, pressure on European growth, inflation, and risk-asset valuations could intensify.

Risks

• Escalation of the Middle East conflict could drive energy prices higher.
• European GDP growth could remain under pressure, particularly if the energy shock is transmitted to consumption and corporate costs.
• Following upward revisions to Euro Area and UK inflation forecasts, monetary policy room may be constrained.
• Renewed tightening of financial conditions could weaken the cushion provided by the current improvement in sentiment.
• The report provides no individual equity ratings or target prices and cannot be used directly as an investment recommendation for any single security.

What to watch

• Changes in energy forward prices, refined petroleum product prices, and electricity prices.
• Whether the Euro Area GSFCI continues to ease or begins tightening again.
• Consumer confidence, investor sentiment, and price-related survey indicators.
• Further Goldman Sachs revisions to 2026 Euro Area GDP growth and Euro Area and UK inflation forecasts.
• Conflict developments and their impact on overseas growth and Europe's trade and energy supply chains.