The European Central Bank published a presentation by Executive Board member Philip R. Lane on the euro area outlook, pairing the March 2026 baseline with adverse and severe scenarios centred on acute energy supply disruptions linked to the Middle East conflict. The exercise maps the implications for real GDP growth and Harmonised Index of Consumer Prices (HICP) inflation, including HICP inflation excluding energy and food, under an assumption of no additional monetary or fiscal policy reaction beyond what is embedded in the baseline. In the baseline, there is no explicit assumption on the duration of the conflict or the destruction of energy infrastructure, and energy prices follow technical assumptions with a cut-off of 11 March 2026. Uncertainty is aligned with the observed increase in the VIX index of 4.4 points between 27 February 2026 and the cut-off date, alongside a limited judgemental upward adjustment to account for potentially larger inflation effects given the size of the energy shock. The adverse scenario assumes acute disruptions without significant further infrastructure destruction, a 10-point VIX increase that reverses quickly in the third quarter of 2026 towards the fourth quarter of 2025 level, and stronger spillovers to other prices and wages due to non-linearities observed after 2021-22. The severe scenario assumes even more acute disruptions and significant further infrastructure destruction, a 14-point VIX increase that remains elevated until end-2027, and sizeable indirect and second-round effects. Simulations use the ECB-BASE and ECB-Global models with the shock starting in the second quarter of 2026, and estimate the GDP impact of uncertainty using conditional forecasts in a BVAR framework; the presentation also reviews survey and market indicators on confidence, activity, pricing and wages.
European Central Bank 2026-03-25
European Central Bank models adverse and severe energy supply disruption scenarios for euro area growth and inflation
The European Central Bank released a presentation by Executive Board member Philip R. Lane on the euro area outlook, assessing baseline, adverse, and severe scenarios due to potential energy supply disruptions from the Middle East conflict. The analysis examines impacts on real GDP growth and Harmonised Index of Consumer Prices (HICP) inflation, assuming no additional policy interventions. The scenarios consider varying degrees of disruption, infrastructure damage, and volatility, using ECB-BASE and ECB-Global models.