European Central Bank president Christine Lagarde said that the global economy had remained ‘surprisingly resilient’ despite the Middle East energy shock and continuing geopolitical uncertainty, but warned that tighter financial conditions and higher long-term interest rates were adding to the downside risks to growth.
Lagarde’s comments came in a statement to the International Monetary and Financial Committee at the IMF Annual Meetings, in which she said that the euro area economy proved resilient in the first half of the year despite global headwinds, with the ECB projecting growth of 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028.
“As the energy shock fades over the medium term, the projections see domestic demand benefitting from a recovery in real income over the medium term, driven by lower energy inflation and a resilient labour market,” Lagarde commented, adding that rising government spend on infrastructure, defence, AI and digital technologies will also support growth.
“The medium-term outlook is surrounded by uncertainty over how intense and long-lasting the Middle East conflict will be, and how the resulting shocks might propagate through the economy,” she added. “Risks to growth are assessed to be on the downside.”
Interest rates and inflation
Lagarde said the increase in long-term interest rates since the ECB’s September meeting meant that financing conditions had tightened more than anticipated in the central bank’s most recent projections. Inflation, she observed, increased to 3.8% in September, reflecting an increase in energy inflation, and to a lesser extent, food inflation.
“The inflation outlook points to higher inflation ahead, especially in the short term, given the latest developments in energy markets,” she commented. “However, we see no evidence at this stage of significant pass-through of energy prices to other prices and wages, beyond what we have already included in our projections. And while growth has been resilient, financing conditions have tightened, with long-term interest rates rising notably since our last meeting.”
Energy costs
Looking ahead, Lagarde anticipated that higher energy costs are expected to keep headline inflation “well above target into the first half of 2027”, with energy price increases feeding through into core and food inflation.
“The risks to the inflation outlook are to the upside due, in particular, to the Middle East conflict and Russia’s unjustified war against Ukraine,” she added. “A more intense or persistent energy shock could strengthen indirect and second-round effects, resulting in higher and more persistent inflation. Extreme weather could push up food prices.
“By contrast, a sustainable resolution of geopolitical conflicts, weaker energy pass-through or more risk-averse financial markets could lower inflation.” Read more here.
