Adjusting for volatility in Irish data, growth is expected at 1.2 per cent in 2026 and 2027, rising to 1.4 per cent in 2028, based on an estimate of euro area GDP using modified domestic demand instead of GDP for Ireland.
ECB staff sees euro area real GDP growth at 0.9 per cent in 2026, 1.4 per cent in 2027 and 1.5 per cent in 2028.
Export demand is expected to strengthen, but competitiveness pressures remain a drag for suppliers.
HICP inflation is projected to peak at 3.6 per cent in Q4 2026 before easing towards 2 per cent.
Energy volatility keeps sourcing cost visibility uncertain.
The ECB projected that real GDP growth had surprised on the upside in the second quarter of 2026, while short-term indicators point to robust growth in the near term as uncertainty recedes, confidence improves and the energy supply shock from the Middle East conflict is assumed to ease gradually.
Compared with the June 2026 projections, GDP growth has been revised up by 0.1 percentage points for 2026, or 0.3 percentage points when adjusting for volatility in Irish data. The 2027 forecast has been revised up by 0.2 percentage points due to data surprises and positive survey indicators with a carry-over effect, while the 2028 growth outlook is unchanged.
The summer heatwave in Europe is expected to have had only a limited and temporary negative impact on economic activity, according to the projections. Over the medium term, domestic demand is expected to be supported by a recovery in real incomes driven by lower energy inflation, along with a resilient labour market, with the unemployment rate expected to reach new historical lows.
Rising government spending on infrastructure and defence, especially in Germany, together with investments linked to artificial intelligence (AI), is also expected to support growth in the later years of the projection horizon. On the external side, export growth is expected to pick up on stronger foreign demand, but persistent competitiveness challenges are expected to continue weighing on exports. The euro area is also expected to benefit less than some other economies from strong global AI-related demand, reflecting the smaller size of its AI goods sector.
The inflation outlook remains shaped largely by the energy shock, which is assumed to dissipate, although the ECB staff projections note high uncertainty around that assumption. Headline inflation, measured by the Harmonised Index of Consumer Prices (HICP), is expected to peak at 3.6 per cent in the fourth quarter of 2026 owing to the surge in energy prices resulting from the Middle East conflict. Increases in crude oil prices are expected to be amplified by additional upward pressure on refined oil products and wholesale gas and electricity prices.
As the main impact of the conflict on energy prices drops out of the year-on-year comparison, HICP inflation is projected to fall to 2.5 per cent in the second quarter of 2027 and hover close to 2.0 per cent thereafter. Energy inflation is expected to follow the assumed decline in energy commodity prices quickly, turning negative during 2027 before increasing in 2028 with the introduction of the EU Emissions Trading System 2 (ETS2).
Non-energy inflation is expected to absorb the energy shock more gradually, rising until early 2027 and then staying elevated before moderating again in 2028. Indirect and second-round effects are assessed as contained. The expected easing of inflation is seen helping to contain wage pressures over the medium term as the economy and labour market improve, although wage growth is expected to remain above its long-term average level.
Overall, the baseline projections foresee HICP inflation rising from 2.1 per cent in 2025 to 3.0 per cent in 2026, before declining to 2.5 per cent in 2027 and 2.1 per cent in 2028. The outlook for headline HICP inflation in 2026 is unchanged from the June 2026 projections, with downward revisions to the food component after significant downward surprises up to July, notwithstanding some upward pressure from adverse weather, offsetting upward revisions to energy inflation.
Headline inflation has been revised up by 0.2 percentage points for 2027 and by 0.1 percentage points for 2028, reflecting expected higher energy inflation in 2027 and stronger core inflation, excluding energy and food, in both years. The stronger core outlook is linked to the better outlook for economic activity and somewhat higher wage growth amid a slight improvement in the labour market. The strength of indirect and second-round effects is expected to be broadly unchanged compared with the June 2026 projections, except for lower indirect effects on food prices.
The economic outlook remains highly uncertain amid the ongoing conflict in the Middle East, the blockade of the Strait of Hormuz and continued volatility in energy prices. To illustrate the uncertainty, the baseline projections are complemented by updated versions of three alternative scenarios from the June 2026 projections: a milder scenario, an adverse scenario and a severe scenario. These differ in their assumptions regarding the magnitude and persistence of the Middle East conflict and energy price shock, as well as the impact of the shock on the international environment and uncertainty.
Fibre2Fashion News Desk (SG)
