Our economic outlook for the euro area
August 11, 2026
Activity proves resilient amid the energy shock
“Euro area activity has so far proven resilient to the energy shock, and we leave our 0.8% growth forecast for 2026 unchanged. We expect the European Central Bank to lean against inflation risks with one further hike this year before policy gradually eases as the shock fades.”
Shaan Raithatha,
Vanguard Senior Economist
Our euro area outlook is clouded by the reescalation of geopolitical tensions. Even so, activity has proven resilient: Second-quarter GDP accelerated to 0.4% quarter over quarter, and all four major economies expanded. Moreover, high-frequency data have firmed, with July’s composite Purchasing Managers’ Index rising back above the no-change mark, manufacturing output at its highest level since early 2022, and economic sentiment improving.
The energy shock has evolved broadly in line with our base-case scenario, leaving our 2026 GDP growth forecast unchanged at 0.8%. We expect growth to rise to 1.3% in 2027 as headwinds from the energy shock and last year’s trade shock fade. German fiscal stimulus remains a tailwind through military and infrastructure spending.
Inflation has evolved broadly in line with our base case. We expect headline inflation to end 2026 at 3.3%, as the pass-through of high energy costs continues to feed through to prices. Risks skew to the downside, should energy prices continue to ease. We foresee core inflation moderating to 2.2%.
We continue to view the risk of inflation expectations becoming de-anchored as low, reflecting a credible European Central Bank (ECB), moderating wage growth, and a less tight labor market than during the pandemic-era inflation surge of 2022. Overall, we see limited evidence that the energy shock will generate material or persistent second-round inflation effects.
Against this backdrop, we expect the ECB to follow up its June hike with one further increase later this year, likely in September. We view both as insurance hikes: With the conditions for entrenched inflation absent, the need for restrictive policy should diminish once energy prices stabilize, and we look for policy to reverse with two cuts in 2027.
Euro area economic forecasts
Notes: GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as of December for each year. Core inflation is the year-over-year change in the Harmonized Indexes of Consumer Prices, excluding volatile energy, food, alcohol, and tobacco prices, based on the fourth-quarter average for each year. Monetary policy is the European Central Bank’s deposit facility rate at year-end.
Source: Vanguard.
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