FRANKFURT, Germany (AP) — The European Union’s executive commission cut its growth outlook and predicted higher inflation due to sharply higher energy prices from the war in Iran — but said the economy will avoid an outright recession.

“As a net energy importer, the EU’s economy is highly susceptible to the energy shock caused by the conflict in the Middle East,” the commission said in a statement Thursday. The rising cost of fuel “means higher household bills and surging business costs that reduce profits for many industries.”

The commission’s spring forecast lowered the outlook for growth in the 21 countries that use the euro to 0.9% for this year, from 1.2% in its autumn forecast, and to 1.2% from 1.4% for 2027. Inflation is now expected to reach 3.0% for 2026, up from the earlier forecast of 1.9%.

The new inflation figure exceeds the inflation goal of 2% set by the European Central Bank, and higher inflation expectations have led to predictions the ECB will raise its interest rate benchmarks this year to combat inflation.

Oil prices rose sharply after risk of Iranian drone and speedboat attacks closed off most ship traffic through the Strait of Hormuz, the sea passage for about a fifth of the world’s oil and natural gas. On top of that, news of the war has shaken consumer confidence, which fell to a 40-month low amid mounting fears of job losses and higher inflation.

Still, the commission said the economy will continue to show modest growth and avoid an outright recession.

It warned however that a downside scenario of a prolonged period of higher energy prices would push growth lower and inflation higher.

The new inflation figure exceeds the inflation goal of 2% set by the European Central Bank, and higher inflation expectations have led to predictions the ECB will raise its interest rate benchmarks this year to combat inflation.