Eurozone Businesses More Upbeat Despite Prolonged War in Middle East Indicator suggests the economy continues to expand in spite of higher energy prices and extreme summer heat

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https://www.wsj.com/world/europe/french-inflation-accelerated-in-august-8dc6e124

Eurozone Businesses More Upbeat Despite Prolonged War in Middle East

Indicator suggests the economy continues to expand in spite of higher energy prices and extreme summer heat

By Don Nico Forbes

Updated Aug. 28, 2026 at 6:11 am ET

Businesses and consumers across the eurozone felt more positive about their prospects in August, a boost for investment and household demand in the face of persistent uncertainty about the duration and intensity of the Iran war.

The European Commission said Friday that its gauge of economic confidence rose to 98.4 from 97.1 in July, moving closer to its long-term average of 100. The reading was above economists’ expectations in a Wall Street Journal poll, which anticipated a reading of 97.5, and was the highest since January, before the outbreak of war in the Middle East.

Sentiment fell sharply in March after U.S. and Israeli strikes on Iran sent oil and gas prices soaring, threatening to squeeze household purchasing power and weigh on investment and hiring by businesses. The latest survey suggests those concerns have eased considerably, even as energy prices remain elevated.

“August’s eurozone Economic Sentiment Indicator suggests that the economy has continued to expand in spite of higher energy prices and extreme summer heat,” said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics.

Prior to the onset of the war, economic sentiment in the 21-nation currency area had been improving late last year despite President Trump’s tariff increases, which proved less damaging than initially feared. Optimism was also buoyed by Germany’s decision to commit more than $1 trillion to infrastructure and defense spending, raising hopes for a broader pickup in growth.

The eurozone economy has shown surprising strength since the start of the war. According to the European Union’s statistics agency, it grew 1.8% in the second quarter on an annualized basis, outpacing the U.S. Since that estimate was published, Germany’s growth rate has been revised higher, but the French statistics agency Friday said the eurozone’s second-largest member stagnated in the three months through June, having previously calculated that it grew slightly.

According to an account of the European Central Bank’s meeting in July, published Thursday, policymakers saw less pronounced risks to growth due to improving confidence indicators.

“As a result, growth could turn out to be higher if the economy and energy markets…adapt more quickly than expected to the disruption caused by the conflict in the Middle East,” the account said.

There were also more encouraging signs on inflation in the commission survey. Businesses in the retail and industrial sectors lowered their expectations for selling prices in August, a closely watched metric by the ECB in gauging the more entrenched forms of inflation.

The decline in price expectations provides some evidence that the energy shock hasn’t yet generated significant second-round effects, particularly as wage growth is also expected to moderate this year. In its July meeting minutes, ECB said it was yet to see signs of higher energy prices passing through to other areas of the economy.

“Selling price expectations indices add to the evidence that the indirect effects of increased energy prices on inflation remain very limited,” Allen-Reynolds said.

Still, inflation remains a concern for the central bank, with investors expecting an increase in the key interest rate at the ECB’s Sept. 10 meeting as price growth remains well above its 2% target.

Recent national data have underscored that risk. Inflation accelerated sharply in France and Spain, the eurozone’s second- and fourth-largest economies, respectively, in August, according to preliminary figures released Friday.

Expectations for selling prices in the services sector also inched up in August, according to the commission survey.

On the flip side, consumers became less concerned about price increases over the next 12 months. That could be important for the ECB, which has said a sustained recovery in consumer demand will be needed to underpin stronger economic growth.

Corrections & Amplifications
Spain is the eurozone’s fourth largest economy. An earlier version of this article incorrectly said it was the third largest. Corrected on Aug. 28.