Euro Zone Consumer Confidence Plunges Due to Iran War

Euro Zone Consumer Confidence Plummets After Iran Conflict Escalation

Impact of Iran Conflict on Euro Zone Economy

By Balazs Koranyi

Consumer Confidence Hits New Lows

FRANKFURT, March 23 (Reuters) - Euro zone consumer confidence fell to its lowest level since late 2023 this month, a European Commission survey showed on Monday, offering early evidence of how the war with Iran and surging energy prices may impact the broader economy.

Consumer confidence fell to -16.3 this month from a revised -12.3 in February, coming well below expectations for -14.4 in a Reuters poll of economists. For the broader EU, the indicator fell to -15.2 from -11.8, the Commission said in a flash release that will be followed by more detailed results later this week.

Expert Commentary on Economic Outlook

"The four-point drop in March is one of the largest falls on record other than at the start of the pandemic and the Ukraine conflict," Andrew Kenningham at Capital Economics said. "Based on our current working assumptions about oil and gas prices, we think household spending will decline and cause GDP to stagnate over the next two quarters."

Price Growth and Inflation Concerns

Oil Prices and Household Impact

PRICE GROWTH SEEN ACCELERATING

Oil prices have surged since the start of the U.S. and Israeli war on Iran, pushing up household fuel costs immediately and raising the prospect of rapid inflation.

This has already raised borrowing costs for households, including through some mortgage rates, as financial investors think the European Central Bank will be forced to raise interest rates to curb price pressures.

Disposable Income and Wage Trends

This is likely to be especially painful for households as they are hit with higher pump prices and increased borrowing costs, eroding their disposable income.

All this is coming as wage pressures have finally dissipated in the euro zone, according to the ECB's own wage tracker, which shows negotiated wage growth of 2.6% this year, a figure that is largely consistent with inflation holding at the bank's 2% target.

ECB Response and Future Projections

However, price growth is now certain to accelerate given the spike in energy costs and the ECB's most benign scenario sees it jumping to 2.6% this year and the severe scenario putting it above 4%.

While the ECB normally looks past such energy price surges, policymakers said they will raise interest rates if there is risk that price growth is getting entrenched.

Policymaker Statements

"We can do little about the inflation spike in the next few months," ECB policymaker Peter Kazimir said. "But if we judge that the risk of inflation remaining above our target for a prolonged period is significant, we will act with appropriate forcefulness to bring inflation back down to our target."

(Reporting by Rafal Nowak in Gdansk and Balazs Koranyi in Frankfurt; Editing by Alison Williams)