Eurozone Inflation Soars to 3%, Economic Growth Nears Stagnation

The Eurozone economy is facing dual pressures of growth and inflation under the impact of the Iran war.

Preliminary data shows that the Eurozone's Q1 GDP growth rate was only 0.1% quarter-on-quarter, lower than the expected 0.2%, barely achieving growth. The year-on-year initial value is 0.8%, lower than the expected 0.9%, and the previous value was 1.2%.

There is a divergence in the trends of the two major economies within the region: Germany's economy has slightly accelerated to 0.3%, while France has stagnated. Germany's Q1 GDP grew by 0.3% quarter-on-quarter, slightly higher than the previous value; France recorded 0.0% quarter-on-quarter; Italy's growth slowed to 0.2%, also lower than the previous value.

At the same time, the inflation rate in April soared to 3%, significantly accelerating from 2.6% in March, and much higher than 1.9% two months ago. The data was released just before the European Central Bank's interest rate decision on Thursday, with the market widely expecting the central bank to keep the benchmark interest rate at 2% unchanged.

Energy prices are the core driver of this round of inflation. Eurostat data shows that energy costs rose by 10.9% year-on-year in April, much higher than 5.1% in March. The blockade of the Strait of Hormuz has forced Europe to seek sources from outside the Middle East in a market with high demand and intense competition, leading to a continuous rise in oil, gas, and aviation fuel prices.

It is worth noting that the core inflation rate, excluding food and energy, slightly fell from 2.3% in March to 2.2%, and there is no sign yet of a "secondary effect" of a wage-price spiral. Morgan Stanley analysts believe that this means the European Central Bank does not need to act hastily in the short term, and maintaining a wait-and-see approach is in line with expectations.

However, the policy dilemma faced by the European Central Bank is not easy. Raising interest rates can suppress inflation, but it will further drag down already weak economic activity and consumer confidence; and the root of this inflation lies in the external shock of energy prices, which monetary policy itself cannot do much about. Economists worry that the Eurozone is sliding into "stagflation" - a dilemma where low growth, high inflation, and rising unemployment coexist.

The Berenberg Bank in Germany warns that the triple impact of Trump's tariffs, China's export subsidies, and the Iran war is "devastating the European economy." The institution's base scenario assumes that the worst impact of the war ends before the end of April, but still expects Europe's growth rate to be lower than last year, and urges the European Central Bank to remain on hold for the time being. Its analysis also points out that if the European Central Bank rashly raises interest rates to deal with this temporary inflation peak, the Eurozone may fall into an "unnecessary minor recession" between the end of 2026 and the beginning of 2027.

The key signals to follow in the future include whether the situation in the Strait of Hormuz can ease in the short term, whether energy prices will transmit to core inflation to form a secondary effect, and how the European Central Bank will find a balance between suppressing inflation and nurturing growth in the next few meetings.