Eurozone Economy Grows Despite Middle East War

The eurozone economy displayed unexpected strength in the second quarter of 2026, growing by 0.4 percent and defying earlier predictions of slower expansion. This resilience is particularly noteworthy given the ongoing energy shock stemming from the Middle East war, which had raised concerns about economic stability.

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The continued steady growth of the eurozone economy... shows that households and businesses have not pared back their spending much due to the Iran war.

Official data from Eurostat revealed that the 21-country eurozone recorded zero growth in the first three months of 2026. This revised figure, adjusted from an earlier report of a 0.2 percent contraction, had fueled fears of a technical recession, defined as two consecutive quarters of negative economic growth. Thursday's data, however, suggests the European economy is weathering the impact of the US-Iran war more effectively than anticipated.

Andrew Kenningham, chief Europe economist for Capital Economics, noted that the steady growth indicates households and businesses have maintained their spending levels despite the conflict. He expressed optimism for the second half of the year, predicting continued steady growth. Capital Economics estimates that excluding Ireland, the eurozone economy grew by approximately 0.25 percent, highlighting that the headline figure is significantly influenced by specific national economic activities.

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We think the economy will continue growing steadily in the second half of the year.

Ireland's economy reported a remarkable 3.9 percent growth in the second quarter, a substantial rebound from a 7.0 percent contraction in the previous quarter. This dramatic swing is attributed not to underlying economic activity but to accounting maneuvers by multinational companies, particularly in the pharmaceutical and tech sectors, seeking to leverage Ireland's favorable corporate tax rates. Meanwhile, major European economies like Germany, France, and Italy also contributed to the growth, though Germany's expansion slowed to 0.2 percent in the second quarter. The European Central Bank recently lowered its eurozone growth projection for the year to 0.8 percent from 0.9 percent.

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All told, the data published today suggest that the economy is weathering the Iran war quite well.