Pessimism begins in Europe as the Iran war hits the economy and consumer confidence

Economic and consumer confidence fell in Europe in March, according to official data released on Monday, in the latest evidence that the war in Iran is weighing on growth and inflation expectations.

Preliminary data from the European Commission show economic sentiment fell in both the EU (down 1.5 points from last month to 96.7) and the euro area (down 1.6 points to 96.6) in March.

The figures, which measure economic sentiment in five key sectors of the European economy, also reveal job prospects are under pressure across the EU and the euro area. Retail, service and industrial employers are all adjusting their employment plans against the backdrop of the ongoing war in the Middle East.

The recession is adding to the depression seen in February, but the Commission warned that the latest published data showed “a sharp contraction in the economy in March”, which had pushed economic sentiment and job prospects “away from the long-term average of 100.”

Consumer confidence also fell sharply to its lowest level since Oct. 2023, “driven by a sharp decline in consumer expectations for the overall economic situation in their country.”

“Consumers also became more optimistic about their households’ financial situation in the future and were less inclined to buy more in the next 12 months,” the Commission added.

It follows separate data showing eurozone private sector output fell to a 10-month low and headed into contraction territory in March, fueling fears of looming stagflation.

In updated estimates released on March 19, the European Central Bank now expects economic growth of 0.9% in 2026, and headline inflation to average 2.6% this year.

ECB President Christine Lagarde said last week that the central bank was watching the data closely and would respond by raising interest rates if necessary.

European leaders have refused to participate in the US and Israeli bombing of Iran, seeing war as an option, rather than a necessity.

However, Iran’s retaliatory attacks and the complete closure of the Strait of Hormuz have raised global energy prices, and Germany’s defense minister warned last week that the conflict represents a “disaster” for the world economy.

The President of the United States, Donald Trump, last week, signed last week that he will offer peace talks with Iran, through the mediation of Pakistan, for some time – although no formal talks have been confirmed by the White House or Iran yet.

However, at the same time, the US has sent thousands of troops and military equipment to the region, indicating that there may be a potential offensive. Muddying the waters even more, Trump told the Financial Times on Sunday that he would “take the oil from Iran” and seize the Iranian outpost of Kharg Island.

Senior European officials fear that the economic and political consequences of the conflict may be worse than previously thought, according to Mujtaba Rahman, managing director for Europe at Eurasia Group.

“I spent the last week and a half in Brussels talking to more than 60 senior European officials about the Iran war and its implications for Europe,” Rahman said in an emailed interview on Saturday.

“There was an almost unanimous agreement among those I spoke with about three things. First, the regime in Tehran may survive and, while it is weak, it will be firmer and stronger than its predecessor,” he said.

“Secondly, any effort to save the Strait of Hormuz is unlikely to gather for the foreseeable future. Thirdly, the economic and political consequences of the conflict-especially related to the stability of the transatlantic alliance-may appear to be much worse than the vision of the agreement,” he added.

Holger Schmieding, chief economist at Berenberg, said markets are pricing in that the conflict will last a few more weeks, at least, and that “things are likely to get worse instead of better.”

“But the markets are also hesitant to be really, really, really, because with Trump, you never know for sure. It could be a few days from now, he announces the outcome of the negotiations,” he told CNBC’s “Squawk Box Europe” on Monday.

“What we’re seeing at the moment is a lot of uncertainty, there’s a lot that can happen next week. [there could be] the start of a ground attack, weak but still possible…or maybe a deal. As a result [there is] serious uncertainty, in general, an increasing level of risk – that seems to be the current situation,” he said.