Pessimism sets in for Europe as Iran war hits economic and consumer confidence

Economic and consumer confidence plummeted in Europe in March, according to official data released on Monday, in the latest evidence of how the Iran war is upending growth and inflation expectations.

Preliminary data from the European Commission shows economic sentiment declined in both the EU (down 1.5 points from the previous month to 96.7) and the euro area (down 1.6 points to 96.6) in March.

The figures, measuring economic sentiment across five key sectors of the European economy, also reveal employment expectations are under pressure across the EU and euro zone. Employers in the retail trade, services and industry sectors are all adjusting their employment plans against a backdrop of ongoing war in the Middle East.

The slump adds to a deterioration seen in February, but the Commission warned the latest data prints showed a "marked deterioration of economic sentiment in March", which had driven both economic sentiment and employment expectations "away from their long-term average of 100."

Consumer confidence also fell sharply to its lowest level since Oct. 2023, "driven by a dramatic decline in consumers' expectations for the overall economic situation in their country."

"Consumers also became markedly more pessimistic about their household's future financial situation and less prone to make major purchases over the next 12 months," the Commission added.

It follows separate data showing euro zone private sector output fell to a 10-month low and toward contraction territory in March, raising fears of looming "stagflation".

In revised forecasts released on March 19, the European Central Bank now expects economic growth of 0.9% in 2026, and headline inflation to average 2.6% this year.

ECB President Christine Lagarde said last week that the central bank was watching data closely and would respond with interest rate hikes if necessary.

European leaders have refused to get involved in the U.S. and Israel's bombardment of Iran, seeing the war as one of choice, rather than necessity.

Nonetheless, Iran's retaliatory strikes and almost total closure of the Strait of Hormuz have pushed up global energy prices, with Germany's defense minister warning last week that the conflict represented a "catastrophe" for the world's economies.

U.S. President Donald Trump last week signalled last week that he would give peace talks with Iran, via intermediary Pakistan, some time -- although no formal talks have been confirmed by the White House or Iran, as yet.

At the same time, however, the U.S. has sent thousands of troops and military resources to the region, signalling a possible ground offensive could be coming. Muddying the waters further, Trump told the Financial Times on Sunday that he could "take the oil in Iran" and seize Iran's export hub of Kharg Island.

Senior European officials fear the economic and political implications of the conflict are likely to prove far worse than initially presumed, according to Mujtaba Rahman, managing director of Europe at Eurasia Group.

"I spent the last week and a half in Brussels speaking with more than 60 senior European officials about the war in Iran and its implications for Europe," Rahman said in emailed analysis on Saturday.

"There was near unanimous agreement among those I spoke to about three things. First, the regime in Tehran is likely to survive and, while weakened, will be more resolute and radical than its predecessor," he noted.

"Second, any effort to secure the Strait of Hormuz is highly unlikely to come together for the foreseeable future. Third, the economic and political implications of the conflict—especially pertaining to the stability of the transatlantic alliance—are likely to prove far worse than the consensus view," he added.

Holger Schmieding, chief economist at Berenberg, said markets are pricing in that this conflict will last a few more weeks, at least, and "that things are more likely near term to get worse rather than better."

"But markets also hesitate to become really, really negative, because with Trump, you never quite know. It could be that a few days from now, he announces a result of negotiations," he told CNBC's "Squawk Box Europe" on Monday.

"What we currently see is even more elevated uncertainty, with a range of potential things that could happen over the next week. Either [there could be] the start of a ground invasion, limited but still possible ... or possibly a deal. So [there is] grave uncertainty with, all in all, a rising risk profile — that seems to be the current situation," he said.