UBS on Tuesday announced a downward revision to its Eurozone growth outlook, identifying the continuing conflict in Iran as a principal factor behind weaker growth prospects, rising inflation and an increased likelihood of tighter central bank policy across the region.
The brokerage lowered its forecast for Eurozone gross domestic product in 2026 by 0.5 percentage points to 0.8% and trimmed the 2027 forecast by 0.2 percentage points to 1.2%. Its projection for 2028 remains unchanged at 1.0%.
Country-level adjustments
UBS made sharper reductions to forecasts for economies with heavier exposure to energy-intensive industry. Germany's 2026 GDP outlook was cut in half, from 1.2% to 0.6%, with a rebound to 1.5% pencilled in for 2027. Italy's 2026 forecast fell to 0.5% from 0.9%.
France's growth was trimmed to 0.9% for 2026 and to 1.0% for 2027. Spain, which UBS describes as the "growth champion" among large Eurozone economies, saw only a modest 0.1 percentage point downgrade to 2.2% in 2026 and 1.7% in 2027.
Outside the Eurozone, the bank reduced the United Kingdom's 2026 forecast by 0.5 percentage points to 0.6%, citing limited fiscal space, a soft labour market and faster pass-through of wholesale gas prices to the domestic economy. Switzerland's 2026 and 2027 forecasts were each trimmed to 1.1%, while Sweden's 2026 projection was lowered to 2.0%.
Inflation trajectory and central bank response
UBS highlighted elevated inflation as a near-term risk. Eurozone Harmonised Index of Consumer Prices (HICP) inflation rose by 0.6 percentage points to 2.5% year-on-year in March, a move the bank attributes to higher energy prices. UBS expects a further increase to 3.0% in April, with inflation peaking at 3.4% in May before easing to 3.2% by December. For full-year 2026 UBS projects an average HICP inflation rate of 2.8%, followed by 2.3% in 2027.
In response to this inflation outlook, UBS anticipates the European Central Bank will deliver two 25 basis point rate hikes in June and September, taking the deposit rate to 2.5%. The bank also notes that market pricing for ECB rates has shifted hawkish by 82.2 basis points since February 27.
Other central bank expectations include the Bank of England holding policy before cutting in November 2026 and February 2027, with a forecasted policy rate of 3.50% by end-2026. The Swiss National Bank is expected to hold at 0.00% through 2026 before hiking in mid-2027, while Sweden's Riksbank is seen on hold at 1.75% through the end of the year.
Fiscal policy and limited government support
UBS anticipates government fiscal support will remain constrained, at under 0.5% of GDP, focusing mainly on energy-related tax measures. The bank cites examples such as Italy's excise tax reduction and Spain's reduction of VAT on electricity from 21% to 10%. These measures are far smaller than the roughly 2% of GDP deployed in 2022-23, and UBS estimates they would add at most 10 to 20 basis points to GDP growth.
Downside risks
UBS warned that risks to its revised forecasts are skewed to the downside. The brokerage explicitly highlights the prospect that a prolonged conflict, or more extensive damage to energy infrastructure, could push energy prices higher, raise uncertainty and trigger supply chain disruptions—all of which would weigh on growth.
The distributional impact of these developments is uneven across the region, with Germany and Italy bearing more downside exposure than France and Spain due to their larger shares of energy-intensive industry.
Overall, UBS's revisions reflect a scenario in which geopolitical developments materially influence inflation dynamics, monetary policy and near-term growth outcomes across Europe.