Goldman Sachs tracks the impact of the Middle East conflict on the European economy: growth downgraded, inflation pushed higher, but the natural gas shock is weaker than in 2022

Overview

This report tracks the impact of the Iran-related Middle East conflict on the European economy, focusing on energy prices, financial conditions, consumer confidence, business surveys, and high-frequency growth models. Goldman Sachs compares the current shock with macro variable reactions after the March 2022 Ukraine conflict and concludes that the current natural gas shock is more contained for Europe, but the inflation pressure from oil prices, end-user energy prices, and price expectations deserves more attention.

Core views

The report's core view is: first, rising energy prices and tighter financial conditions are a negative shock to euro area growth, and the euro area 2026 real GDP forecast has been materially cut; second, the UK growth forecast recovered after an earlier downgrade, helped by stronger-than-expected pre-war data; third, inflation forecasts have been revised up, with 2026 headline inflation expectations in both the euro area and the UK significantly higher than at the start of the year; fourth, compared with 2022, the current shock is temporarily less damaging to consumer confidence and economic sentiment, but the upward pressure on input prices, output prices, and inflation expectations is building faster.

Analysis framework

The report uses an event-tracking framework, incorporating daily energy prices, the GS Euro Area Financial Conditions Index, consumer sentiment indicators, PMI, and European Commission survey data. It also uses a high-frequency growth model to decompose the model-implied shock to 2026 Q4/Q4 growth from energy prices and financial conditions. In addition, the report compares the changes in key macro variables after the current Middle East conflict with the standard-deviation changes in similar variables after the 2022 Ukraine conflict.

Methodology notes

• Macro financial conditionsGS Euro Area Financial Conditions Index

  Financial conditions index

  Used to measure how much euro area financial conditions have tightened relative to the starting point after the conflict and to assess the drag on growth.

• High-frequency growth trackingGS higher-frequency growth model

  High-frequency growth model

  The model combines energy prices, financial conditions, and overseas growth to quantify the impact on euro area 2026 Q4/Q4 growth.

• Event comparisonMiddle East War 2026 vs Ukraine Invasion 2022

  Event shock comparison

  Compares the standard-deviation changes in several European macro indicators relative to their six-month average after the current conflict with the path after the 2022 Ukraine conflict.

Asset mapping & comparison

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

• Euro area macro assets

  Directly affected by conflict transmission

  Strengths

  The current natural gas shock is more contained than in 2022, and some industrial production and lending data remain resilient.

  Weaknesses

  Growth forecasts have been significantly cut, while consumer confidence, services, and economic sentiment surveys have weakened.

  Comparison

  Compared with the 2022 Ukraine conflict, the current shock is temporarily less damaging to confidence and sentiment, but price pressure is rising faster.

  Risks

  Further increases in energy prices, renewed tightening in financial conditions, and unanchored inflation expectations.

• European energy and oil & gas related assets

  The conflict transmits through oil, gas, electricity, and end-user fuel prices

  Strengths

  The natural gas forward curve is far below the March 2022 level, indicating that the gas shock is relatively contained.

  Weaknesses

  The current Brent crude curve is clearly above the February 2026 level, and rising diesel and gasoline prices are intensifying cost pressure.

  Comparison

  The 2022 gas price shock was more extreme; in this round, the oil price shock is described by the report as more persistent.

  Risks

  Escalation of geopolitical conflict, supply disruptions, and further upward pressure on European end-user energy prices and inflation.

• UK macro assets

  Affected by energy prices and spillovers from Europe, but data performance differs from the euro area

  Strengths

  Goldman Sachs' 2026 UK growth forecast recovered later in the period and is above Bloomberg Consensus.

  Weaknesses

  UK headline inflation is forecast to rise from about 2% at the start of the year to about 3.3%, leaving inflation pressure still elevated.

  Comparison

  The UK's growth forecast is more resilient than the euro area's, but the direction of the inflation revision is the same.

  Risks

  A second energy shock, pressure on real incomes, and a persistently tight monetary policy stance.

Key data

• Euro area 2026 Q4/Q4 real GDP growth forecastGoldman Sachs around 0.53%, Bloomberg Consensus around 0.8%The Goldman Sachs forecast was cut from about 1.4% at the start of the year to about 0.5% by mid-May, below the market consensus.
• Euro area 2026 GDP downgradeAbout 0.8 percentage pointsBoth the text and charts show that the euro area growth forecast was materially reduced after the conflict.
• Euro area 2026 Q4/Q4 headline inflation forecastGoldman Sachs around 3.4%, Bloomberg Consensus around 3.1%The Goldman Sachs inflation forecast was revised up after March and is above consensus.
• UK 2026 Q4/Q4 real GDP growth forecastGoldman Sachs around 1.32%, Bloomberg Consensus around 0.85%The UK Goldman Sachs forecast was sharply downgraded in March, then recovered as pre-war data came in stronger than expected.
• Change in the GS Euro Area Financial Conditions IndexPeak around +0.39 to +0.40 percentage points in late March, around +0.17 percentage points on May 14Financial conditions tightened quickly at first, then partially eased, but still indicate some tightening.
• Model-implied euro area growth shockTotal shock around -0.24 percentage points on May 14Energy prices contribute about -0.25 percentage points and are the main negative source; financial conditions contribute close to zero.
• Brent crude forward curveCurrent forward curve falls from about $109 per barrel at 3 months to $78 per barrel at 24 monthsThe current curve is above the February 2026 forward level, but below the full curve level seen in March 2022.
• Euro area one-year inflation expectations among consumersMedian up 1.5 percentage points to 4.0%From the March data in the ECB Consumer Expectations Survey.

Impact & implications

For asset allocation and macro judgment, the report points to rising stagflation risk in Europe: the growth side is being pressured by energy prices and weaker sentiment, while the inflation side is being pushed up by oil prices, fuel prices, firms' selling price expectations, and consumer inflation expectations. The euro area growth forecast is below consensus, implying that Goldman Sachs is more cautious on downside risks to European growth; at the same time, its inflation forecast is above consensus, which may limit room for monetary easing. Attention should be paid to energy, European rates, euro area cyclical assets, and European consumer-related risk assets as new data come in.

Risks

• The Middle East conflict expands, leading to further increases in oil or natural gas prices.
• European consumer confidence and business sentiment continue to deteriorate, with growth downgraded more than currently expected.
• Price-related surveys and consumer inflation expectations keep rising, creating more persistent inflation pressure.
• Financial conditions tighten again, amplifying the drag of the energy shock on the real economy.
• Most chart values are visual estimates; exact figures should be taken from the original data or the formal report tables.

What to watch

• May flash PMIs for the euro area, France, Germany, and the UK.
• Preliminary May CPI data for the euro area and member states.
• The ECB Consumer Expectations Survey and changes in inflation expectations.
• Price-expectation subcomponents in Germany's ifo, GfK, France's INSEE, and European Commission surveys.
• The subsequent path of Brent crude, TTF natural gas forwards, and European electricity prices.
• Whether the GS Euro Area Financial Conditions Index tightens significantly again.