Speaking after the European Central Bank held interest rates steady, Lagarde pushed back against recent market narratives suggesting stagflationary conditions are emerging in the bloc.
Analysts have flagged concerns in recent days as economic indicators point to elevated price pressures alongside weakening growth momentum. However, she clarified that the current environment does not resemble the prolonged high inflation and unemployment dynamics historically associated with stagflation, Reuters reported.
At the same time, the ECB acknowledged a more challenging outlook. The central bank noted that upside risks to inflation, already significantly above its target, have increased, while downside risks to economic activity have also intensified. The euro zone economy recorded only marginal growth in the previous quarter, underlining the fragility of the recovery, according to Reuters.
Despite these concerns, the ECB’s baseline projections from March still suggest a modest expansion path. The central bank expects the euro area to grow 0.9% in 2026, followed by 1.3% in 2027 and 1.4% in 2028. These figures, while lower than earlier expectations, do not indicate stagnation or recession, Reuters reported.
Lagarde also indicated that the economy may be diverging from the March baseline scenario, reflecting evolving global conditions. In an alternative adverse scenario outlined earlier by the ECB, based on assumptions such as oil prices averaging close to $120 per barrel and significantly higher natural gas prices, the euro zone economy would grow at a slower pace of 0.6% this year, before recovering to 1.2% in 2027 and 1.6% in 2028, according to Reuters.
Overall, while risks are clearly rising on multiple fronts, the ECB maintains that the euro zone is not currently experiencing stagflation, even as it navigates a more uncertain economic environment, Reuters reported.
