The European Central Bank published an analysis finding that the rise in energy prices following the outbreak of war in the Middle East is weighing on euro area consumption by worsening the terms of trade and reducing real disposable income. As the euro area imports most of its energy, the price shock transfers income abroad while higher production costs reduce output, labour demand, real wages and employment. A model calibrated to the increase in real energy prices in the second quarter of 2026 indicates that indirect losses through labour income account for about 80% of the decline in aggregate consumption, while the direct purchasing-power effect accounts for 20%. Consumption initially falls by about 1.4% among liquidity-constrained households, twice the 0.7% decline for unconstrained households, reflecting their greater energy spending, reliance on labour income and limited savings. The analysis assumes unchanged real interest rates and excludes confidence and uncertainty effects, which could alter or amplify the impact. The ECB assessment indicates that recent developments have increased the likelihood that energy prices will remain elevated, prolonging the drag on household income and consumption.
European Central Bank2026-08-03
European Central Bank finds Middle East energy shock is recessionary and disproportionately affects liquidity-constrained households
The European Central Bank finds that the Middle East energy price shock is reducing euro area consumption mainly through lower wages and employment. Consumption initially falls about 1.4% for liquidity-constrained households, compared with 0.7% for unconstrained households. Persistently elevated energy prices could prolong the pressure on real incomes and spending.