Growth was stronger than expected in Q2 and is set to strengthen further in the coming quarters. According to our forecasts, it will reach 1.5% in 2027 after 1.1% in 2026. This growth is expected to be driven by investment and its knock-on effect on exports. On an annual average basis, inflation is expected to stand at 3% in 2026 and 2.8% in 2027, peaking at the end of 2026. The ECB is expected to continue its monetary tightening. At this stage, a single further rate rise, aimed at keeping inflation expectations anchored, is expected in December. The impact of rising interest rates (key policy rates and market rates) on public finances and private sector borrowing conditions will be worth monitoring.
Growth: beyond the shocks, a resilient momentum
Growth in the Eurozone remained robust in the first half of 2026, at 0.25% q/q in Q1 and 0.33% q/q in Q2, excluding Ireland (where economic activity is volatile). It was driven by Germany, where signs of a recovery are becoming clearer (see the Germany page in this EcoPerspective issue). Our baseline scenario forecasts growth of 1.1% in 2026, followed by 1.5% in 2027 on an annual average basis.
This growth is expected to be driven by the strengthening of trends already underway in public and private investment (particularly in defence and AI) and in exports (trade in services and intra-zone trade in goods). Household consumption is likely to be resilient too. According to our forecasts, job creation would continue to underpin household incomes, thereby cushioning the impact of inflation.
Growth and inflationA new lease of life for industry
The Eurozone is undergoing one of the most profound industrial transformations in its history. This is giving rise to divergences between key sectors but, above all, to new drivers of growth whose effects are becoming increasingly apparent (see our analysis). Indeed, the signs of an economic recovery are growing stronger. Business sentiment indicators show a marked improvement in the economic outlook across most sectors (see Chart 1), driven primarily by electronics (AI, digitalisation), the automotive sector and aerospace. European industry is thus benefiting from strong demand for capital goods; a structural trend that will continue to be fuelled by ongoing investment cycles in AI, defence and electrification.
The introduction of minimum European content quotas in the draft law on the industrial accelerator, together with the Commission’s intention to tighten the criteria for access to European public procurement markets, will provide additional support for European industry in the longer term.
A broader recovery in industrial activity is on the horizon
Foreign trade: a repositioning that is paying off
Following a decline in 2026, linked to rising energy import costs, the trade surplus is expected to rise to around 3.0% of GDP in 2027 (of which 2% of GDP for goods and 1% for services). Growth in European exports has slowed compared with its pre-Covid trend and is being hampered by the decline in Chinese and US markets. However, Eurozone exports in volume rose significantly in Q2 (+3.4% q/q). More importantly, since Liberation Day (April 2025), Eurozone countries have found significant sources of growth amongst other European partners, which has enabled them to cushion the decline in exports to certain third markets. This is evident in exports to the rest of the EU, EFTA countries (Switzerland in particular) and, to a lesser extent, the United Kingdom, Ukraine and the Balkans (see Chart 2). The momentum of intra-European trade therefore remains very strong. It is expected to strengthen further with the anticipated investments in defence, AI and electrification.
Exports to Europe help offset weaknesses in other marketsFinancing: financial conditions are expected to remain tight
Financial conditions in the Eurozone remained tight in Q2 2026, according to indices calculated by the ECB (including the BIG [Broad Intermediation Gauge]). They are expected to tighten more significantly in the second half of the year:
i/ the rise in long-term bond yields, which has accelerated since the outbreak of the conflict in Iran, is expected to continue;
ii/ the ECB will continue its monetary tightening (+25 bps in Q3, then in Q4).
For the time being, the debt burden is still weighing only moderately on public finances due to the long average maturity of countries’ debt (8.2 years on average in the Eurozone in July), but this burden will increase by 2030.
On the corporate front, the rise in interest rates has remained contained (+2 bps since January 2026, reaching 3.9% in July), which has contributed to the strong growth in new investment loans (cumulated over one year, +9.1% y/y in July compared with 15.3% y/y in September 2025). By contrast, cumulative net debt securities issues over one year remained stable in July, whilst cumulative net issues of listed shares over one year halved month on month.
Rising interest rates will continue to hamper new variable-rate home loans to households (around 65% of new lending) more significantly than fixed-rate loans, for which rates stood in July at 3.69% (+4 bps m/m) and 3.36% (+2 bps m/m) respectively. New home loans, which are stable in 2026 on a cumulative over one year basis, are therefore unlikely to see any improvement. A fall in real-estate transactions could weigh on new consumer credit through a reduction in expenditure on home furnishings and renovations, whereas consumer credit has been fairly buoyant so far (year-to-date, +5.2% y/y in July compared with +1.4% y/y in January).
Labour market: resilience yet to be confirmed
Employment in the Eurozone rose again by an average of 0.1% q/q in the first half of 2026, driven by Spain and Portugal. Given the growth outlook in these two countries, this momentum is likely to continue, whilst business sentiment surveys in Germany suggest that employment is beginning to stabilise. Nevertheless, employment levels are plateauing (France, the Netherlands) or even falling in other countries (Austria, Finland), which is likely to slow the decline in the Eurozone unemployment rate, meaning it is expected to remain close to current levels in 2027. Furthermore, second-round effects of the rise in inflation on wages cannot be ruled out: the ECB’s wage tracker suggests wage growth of close to 3% by summer 2027 (2.9% y/y in June 2027, compared with 2.6% in September).
Inflation: a peak expected in late 2026
Changes in wage dynamics will be a key factor in the inflation outlook for 2027, whilst energy price rises are picking up again, driven by the conflict in the Middle East. This rise is even sharper than in the spring for gas (linked to restocking ahead of winter) and is likely to feed through to electricity prices in several countries. We therefore anticipate inflation peaking at 3.7% y/y in Q4 2026, before easing as the energy component falls. On an annual average, headline inflation is expected to stand at 3% in 2026 and then at 2.8% in 2027.
At this stage, the pass-through of rising energy prices to other components of the consumer price index, particularly services, remains limited. The alternative core indicators monitored by the ECB, including the PCCI (Persistent and Common Component of Inflation, 2.1% in July), remain close to the 2% target. Core inflation, however, is expected to peak two months later than headline inflation (3% in March 2027).
Inflationary risks are nevertheless tilted to the upside. These are linked to food prices, which are expected to be affected by the energy shock and weather conditions (summer drought, El Niño); they could also stem from a delayed impact of energy price rises on underlying inflation. The rise in prices of energy-dependent inputs (notably chemicals and plastics) and those linked to the AI sector is expected to be sustained. Growth, which we expect to remain robust over the coming quarters, will also fuel underlying inflationary pressures.
Monetary policy: tightening without slowing (growth)
Following two 25-basis-point rises (in June and September), we expect a third in December, which would bring the deposit facility rate to 2.75%. It would then be in slightly restrictive territory (we estimate the upper bound of the neutral rate to be 2.5%). This rise would be aimed primarily at anchoring inflation expectations and, consequently, at curbing the pass-through effects of inflation. Monetary tightening would therefore remain limited. Indeed, the overshoot of the inflation target would be temporary, and the operational framework adopted by the ECB in June 2025 allows it to tolerate this, provided it remains brief. However, it cannot be ruled out that the ECB might take further action if the decline in inflation proves slower than expected.
Public finances are contingent on rising interest rates
The fiscal impulse in the Eurozone is expected to be clearly positive in 2026 due to the rise in defence and infrastructure spending in Germany. This will contribute to a widening of the country’s primary deficit (from +0.9 pp of GDP to 2.8%, according to our forecasts). The improvement in public finances is expected to stall in both France and Italy, at least in 2026, due to the impact of inflation on the debt burden via index-linked bonds. This trend is expected to reverse in 2027 with less expansionary fiscal policies. Nevertheless, the increase in the debt service burden would fuel a further rise in the public deficit, which would thus reach around 3.3% and 3.5% of GDP in 2026 and 2027 respectively (compared with 2.9% in 2025). Against this backdrop, the Eurozone’s public debt-to-GDP ratio is projected to exceed 90% of GDP in 2026 and reach 93% of GDP in 2027, according to our forecasts.
