Eurozone outlook darkens amid energy crunch

The eurozone is entering a more difficult phase as higher energy prices from Middle East tensions are weighing on growth and keeping inflation elevated. Economic activity remains weak, with the region barely expanding, even as the labor market has held up better than expected in parts of southern Europe.

For investors, the key issue is the ECB’s policy dilemma. Inflation risks have risen while growth momentum has softened, which limits room for near-term rate cuts and keeps bond markets sensitive to any shift in expectations.

Credit spreads have stayed relatively contained, but sovereign debt remains vulnerable if energy costs stay high or fiscal pressure builds. The outlook now depends heavily on geopolitics, and a de-escalation could ease inflation quickly, while a prolonged shock would likely hurt European assets more broadly.