Goldman Sachs lowers EU GDP forecast as Iran conflict impacts economic growth

Investing.com – Goldman Sachs has lowered its growth forecast for the Eurozone, as a month-long conflict with Iran disrupted oil flows through the Strait of Hormuz, keeping Brent crude oil prices at or above $100 per barrel.

The firm now expects the Eurozone GDP growth rate for Q4 2026 to be 0.7%, down from the pre-war prediction of 1.4%. Current flows through the Strait of Hormuz are only at 6% of normal levels.

Goldman Sachs economists have raised inflation expectations, forecasting that overall inflation will peak at 3.2% in the second quarter. The European Central Bank is expected to raise interest rates by 25 basis points at both the April and June meetings, but these rate hikes are anticipated to be reversed in 2027 as inflation declines and the economy weakens.

Economic data has begun to show signs of weakness. The Eurozone composite PMI fell from 51.9 in February to 50.5 in March. Composite input prices rose 6.5 points to 65.5, the highest level in over three years, comparable to the increase seen in March 2022.

Previously supported by foreign buying, the flow of funds into European equities reversed this week, with net outflows observed. As energy prices soared and borrowing costs increased, domestic investors shifted from net buyers to net sellers. The recent sell-off stands in stark contrast to the previous 12 to 15 months, during which European investors consistently bought amid expectations of fiscal-driven growth improvement.

Foreign investors, most of whom are from the United States, have been stable buyers in the European market since the beginning of 2025, continuing to purchase until the past week. However, as the war continues and global and European growth forecasts are further downgraded, buying this week has dropped to zero. The destruction of Qatar’s liquefied natural gas production infrastructure has also exacerbated this shift.

Goldman Sachs notes that the cumulative funds flowing into Europe have shown cyclical fluctuations in recent years. Strong inflows post-pandemic peaked in early 2022, followed by a continuous outflow from 2022 to the end of 2024 that completely offset these gains. Over the past year, Europe has benefited from robust buying by both domestic and foreign investors. Despite recent optimism regarding Europe’s potential, the firm believes that Europe has not experienced over-allocation relative to other regions, and in the context of inflows to other areas, Europe remains the least favored region.

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