The European Union (EU) economy is expected to grow at a slower pace with higher inflation, and the positive trend in labor markets is set to halt amid the energy shock triggered by the Middle East conflict, the European Commission's spring forecast said on Thursday.

EU's gross domestic product (GDP) growth is projected to slow to 1.1 percent in 2026, a downward revision of 0.3 percentage points from the last year's autumn forecast, before edging up to 1.4 percent in 2027. In the eurozone, growth is forecast at 0.9 percent this year and 1.2 percent next year.

Inflation in the EU is expected to reach 3.1 percent in 2026 -- a full percentage point higher than previously forecast -- before easing to 2.4 percent in 2027. Eurozone inflation is projected at 3.0 percent in 2026 and 2.3 percent in 2027. Although energy-driven inflation may ease in 2027, energy commodity prices are still forecast to stay about 20 percent above pre-war levels.

The forecast pointed out that EU consumer confidence has dropped to a 40-month low amid mounting fears of surging inflation and job losses.

For 2026, employment growth is forecast to slow to 0.3 percent, then rise to 0.4 percent in 2027, while the long-term decline in the unemployment rate is set to end, stabilizing at around 6 percent in 2027.

Data released by S&P Global on the same day showed the eurozone composite PMI -- a key indicator of business activity -- fell to 47.5 in May, the lowest level in 31 months. The service sector, a key pillar of the economy, took a heavy hit, with its PMI plunging to 46.4, a 63-month low. Meanwhile, the manufacturing PMI stood at 51.4, suggesting the pace of its expansion slowed to its weakest since January.

According to the Commission's forecast, high energy costs have evidently weighed on public finances across the bloc. The general government deficit in the EU is expected to increase from 3.1 percent of GDP in 2025 to 3.6 percent by 2027, reflecting subdued economic activity, higher interest expenditure, energy support measures, and increased defence spending.