BRUSSELS, April 30 (Xinhua) -- Latest Eurostat data released on Thursday suggests the eurozone may be sliding into stagflation, with first-quarter economic growth at a marginal 0.1 percent quarter-on-quarter, rising inflation, limited improvement in the labor market, and soaring energy costs amid the protracted Middle East conflict.
The European Central Bank (ECB) faces a policy trap, warned Dejan Soskic, professor of economics at the University of Belgrade. Inflation remains sticky due to war-driven energy prices, which would normally call for further rate hikes, but the eurozone is already stagnating, with parts slipping into contraction. Any additional tightening, he said, would only deepen the downturn and complicate recovery.
The divergence within the bloc was stark. Ireland, one of the eurozone's fastest-growing economies in recent years, was the bloc's worst performer in Q1, contracting 2.0 percent in a sharp reversal of momentum. France flatlined at zero, Portugal also recorded no growth. Italy managed just 0.2 percent, and Germany, the region's industrial engine, expanded only 0.3 percent.
Of all member states reporting, not one exceeded 1 percent growth. "There were hopes for an acceleration of activity in 2026 and 2027 ... but these have been dashed by the increase in the price of oil," Fabien Bossy, economist at the French bank Societe Generale CIB said.
PRICES BITE AGAIN
More concerning for policymakers, analysts said, was the acceleration of inflation. Eurostat put headline inflation at 3.0 percent in April, up from 2.6 percent in March and moving further above the ECB's 2 percent target.
Energy prices were the main driver, surging 10.9 percent year-on-year, more than double the previous month's increase, Eurostat data showed.
The spillover from the Middle East conflict is increasingly visible in daily consumption. Portuguese newspaper Publico reported on Thursday that the cost of baking a simple cake has risen to 8.38 euros (9.8 U.S. dollars), up 42.5 percent since 2022. Eggs alone have surged 83.9 percent, driven by extreme weather and the war.
Nicola Nobile of Oxford Economics cautioned that the negative effects will become more visible in the second quarter as the full impact of disruptions in the Strait of Hormuz feeds through supply chains.
Analysts note that eurozone unemployment remained near its record low of 6.2 percent in March, but provided little relief from mounting stagflationary pressures. The labor market is increasingly described as frozen, with both hiring and layoffs hovering around historic lows.
Leo Barincou of Oxford Economics said Europe is shifting into a "low-hiring, low-firing" regime, where employment dynamics have effectively stalled. In a worst-case scenario, he warned, a six-month closure of the Strait of Hormuz could push unemployment close to 7 percent as employment contracts.
RECOVERY ON PAUSE
The same pressures are now feeding through to the broader economy. Germany, the eurozone's largest economy, expanded 0.3 percent quarter-on-quarter in Q1, extending a modest recovery from last winter. However, data from the German Institute for Economic Research (DIW) showed the rebound is losing steam as energy costs and uncertainty rise.
"The geopolitical escalation is hitting the German economy in a phase where a dynamic recovery was just taking shape," said DIW economic chief Geraldine Dany-Knedlik on Wednesday. Berlin has already cut its 2026 growth forecast to 0.5 percent from 1 percent.
European officials warned that prolonged conflict in the Middle East is adding to fiscal and economic pressures across the region. Mikko Spolander, director general of the economics department at Finland's finance ministry, said a swift resolution is critical to contain economic damage, warning the shock is compounding fiscal pressures.
"The upside risks to inflation and the downside risks to growth have both intensified," the ECB said in a statement on Thursday.
