The eurozone will face a sharp economic slowdown this year as the Middle East-related energy shock weighs on growth, inflation, and investment.
The bank lowered its 2026 eurozone GDP growth forecast to 0.5% from the 1.1% forecast in its November global forecast, citing rising energy prices, weakening global demand, and tightening financial conditions.
Deutsche Bank expects the eurozone economy to contract by 0.1% quarter-on-quarter in the second quarter—in line with current business activity indicators—then stagnate in the third quarter and return to moderate growth in the final three months of the year. Growth is forecast at 1.1% in 2027. "Before the energy shock, Europe's macroeconomic outlook presented a 'two-economy problem': domestic cyclical resilience in 2025, supported by Germany's fiscal spending in 2026, contrasted with a medium-term outlook clouded by weak competitiveness and a lack of strategic autonomy," the report states.
According to the bank, the shock is transmitted through four main channels: a decline in household purchasing power due to rising inflation, heightened uncertainty curbing investment, monetary tightening, and weaker exports amid slowing global demand. Deutsche Bank estimates that the eurozone's energy import bill will rise by around 1% of GDP in 2026.
Headline inflation, measured by the Harmonized Index of Consumer Prices (HICP), is forecast to average 3.1% in 2026 and 2.5% in 2027, compared with pre-crisis expectations of 1.7% and 1.9%, respectively. Core inflation is projected at 2.4% in both years.
In response, Deutsche Bank expects the European Central Bank to raise its deposit rate by a cumulative 50 basis points to 2.50% by September, following quarter-point increases in June and September. The bank characterized the expected actions as "moderate tightening."
Germany, the eurozone's largest economy, is forecast to grow by 0.5% in 2026. Output is expected to contract slightly in the second quarter and stagnate in the third, followed by a recovery at the end of the year. Deutsche Bank noted that expansionary fiscal policy will be the main stabilizing force for the economy: the government budget deficit will widen to 4.1% of GDP. Employment is forecast to decline by 0.3%.
France and Italy are expected to grow by 0.5% and 0.4%, respectively, in 2026. Italy's forecast is down from the pre-crisis estimate of 0.8%, making it the weakest performer among the four largest eurozone economies. France's budget deficit is projected at 5.2% of GDP in 2026 and 5.4% in 2027.
Italy is expected to continue to benefit from the European Union's NextGenerationEU recovery program: according to the report, the country still had approximately €72 billion ($82 billion) remaining at its disposal by the end of 2025, equivalent to 3.5% of GDP. Outside the eurozone, the UK is projected to perform relatively better, with economic growth expected to reach 1.0% in 2026, supported by a robust 0.6% quarterly expansion in the first quarter.
Consumer inflation is forecast at 3.2%, while the Bank of England is expected to keep interest rates unchanged at 3.75% until the end of the year.
Deutsche Bank noted that risks remain tilted to the downside. In a scenario in which the Strait of Hormuz remains closed throughout the summer, eurozone growth in 2026 could fall to zero, while inflation could rise to 3.5%.