European Central Bank analysis estimates Middle East oil shock could cut euro area growth by 0.4 percentage points in the first year

The European Central Bank published an analysis estimating that the war in the Middle East, through a supply-driven rise in oil prices, is likely to weigh noticeably on euro area activity. Using a model of past geopolitical oil supply disruptions, the ECB estimates that if the oil price path implied by the current futures curve materialises, euro area real GDP growth would be around 0.4 percentage points lower over the first year. The ECB describes the current oil shock as intermediate in size compared with earlier episodes. The increase in oil prices has so far been larger than after Russia’s invasion of Ukraine in early 2022, but smaller than during the Gulf War. Its modelling suggests that a geopolitical oil supply shock that lifts the real oil price by 10% cuts euro area real GDP growth by about 0.2 to 0.3 percentage points in each of the first three years, with the drag working through weaker private consumption and especially weaker investment. Estimates based on more recent data suggest the effect may have moderated somewhat as the euro area has become less oil-intensive, although the investment response remains broadly stable. The ECB notes that the current estimate is highly uncertain and depends on how large and persistent the oil price increase proves to be. Even if oil prices fall back quickly, output losses would still remain, while a more persistent shock, broader supply chain disruptions or spillovers into gas markets could deepen the hit to growth.