Lagarde: ‘The war is weighing on the economy, but the manufacturing sector is holding up’

The euro area economy was gaining some momentum when the war in the Middle East broke out. Real GDP rose by 0.3% in the first quarter of 2026 compared with the previous quarter, once the exceptional volatility recorded in Ireland had been adjusted for. However, the war is now weighing on economic activity, and the latest data point to a slowdown, particularly in the services sector. This was stated by ECB President Christine Lagarde in her address to the European Parliament’s Committee on Economic and Monetary Affairs in Brussels.

“Manufacturing,” Lagarde added, “has, on the other hand, shown some resilience so far. This partly reflects the build-up of stocks in response to pressures on supply chains, but also the increase in defence spending.” Lagarde referred to the latest ECB staff projections, which point to real GDP growth of 0.8 per cent in 2026, 1.2 per cent in 2027 and 1.5 per cent in 2028. “Experts now expect domestic demand to be weaker than forecast in March, as the war has dented confidence and higher energy costs are weighing on real incomes,” she emphasised. “At the same time, household finances remain broadly sound and consumption is expected to continue to be the main driver of growth. Investment is also expected to be supported by business spending on new digital technologies and by increased public investment in defence and infrastructure.”