Deutsche Bank warns that severe energy shock could push eurozone into recession in 2026

Investing.com - Deutsche Bank warned ahead of the European Central Bank’s policy meeting on March 19 that a severe energy shock triggered by Middle East conflicts could lead the Eurozone into a recession by 2026 and force the ECB to reverse its easing path.

The German broker outlined two scenarios. In a more moderate case, with oil at $85 per barrel and natural gas at €50 per megawatt-hour (reflecting market prices as of March 6), the impact on economic growth would be 0.30 percentage points lower than the baseline of 1.1%, and inflation would be 0.33 percentage points higher.

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The adverse scenario assumes energy costs are about 50% higher, with oil at $120 per barrel and natural gas at €75 per megawatt-hour, consistent with a recession in 2026.

In this case, inflation would exceed the pre-conflict baseline by 1.02 percentage points in 2026 and 0.44 percentage points in 2027, while GDP growth would be 0.72 percentage points lower than the baseline in 2026.

“The ECB can ‘ignore’ Scenario 1. But it may not be able to ignore Scenario 2,” the broker said. As of March 12, energy prices are closer to the more moderate scenario.

European Central Bank Governing Council member Isabel Schnabel confirmed on March 11 that the ECB’s updated staff forecasts will partly reflect this shock. Deutsche Bank expects these forecasts to show an overall inflation rate of 2.3% in 2026, up 0.4 percentage points from December, and GDP growth of 0.9%, down 0.3 percentage points.

Market pricing for a rate hike in 2026 is about 30 basis points, compared to expectations of a 10 basis point cut before the conflict began on February 28.

Deutsche Bank stated that a policy change on March 19 is “highly unlikely,” but noted there is a possibility of rate hikes to 2.5% for risk management reasons, which is the “significant restrictive” threshold set by ECB Chief Economist Philip Lane last year, and would not substantially harm growth.

The broker listed four inflation risks: the extent of energy price increases, household inflation expectations, labor market tightness, and fiscal policy. The eurozone unemployment rate remains below the rate consistent with accelerating inflation. While labor shortages have eased, they are “still far from normal.”

Deutsche Bank maintains its baseline forecast that the ECB will keep rates at 2% throughout 2026, raise rates in mid-2027, and by the end of 2028, rates will have increased by 75 basis points, depending on further clarity regarding the conflict. The bank also lowered its Germany 2026 growth forecast from 1.5% to 1%.

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