Our economic outlook for the euro area
June 12, 2026
ECB to hike twice this year amid inflation concerns
“We expect the European Central Bank to lean against the risk of inflation becoming entrenched into longer-term expectations by delivering two ‘insurance hikes’ this year. However, we expect these hikes will be reversed in 2027 as the energy shock fades.”
Shaan Raithatha,
Vanguard Senior Economist
Our euro area outlook is driven by German fiscal expansion and the continent’s high exposure to the Middle East conflict. Early indicators point to a loss of momentum, with first-quarter growth down and survey data suggesting weakness in the services sector.
Since the start of the year, we have revised our 2026 GDP forecast down from 1.2% to 0.8%, reflecting the drag from higher energy prices and trade disruption. We expect growth to recover to 1.3% in 2027 as the impact of the energy shock fades and German investment accelerates.
Data is beginning to reveal the true impact of the conflict in the Middle East. Input prices are rising quickly, and supply chains are facing disruption. However, we do not anticipate significant additional pass-through to inflation from wages and price-setting behavior beyond the direct effect of the energy shock. This is due to well-anchored long-run inflation expectations, a historically low pass-through of wages to prices, and a labor market that is less tight than in 2022. Accordingly, we expect core inflation to end the year at 2.2% and edge up only modestly to 2.3% in 2027.
We anticipate that the European Central Bank (ECB) will deliver two hikes this year. The Governing Council has highlighted the importance of a risk-management approach to lean against long-term inflation risks from the Middle East conflict. As the shock unwinds, we expect policy to normalize, 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, as of December for each year. Monetary policy is the European Central Bank’s deposit facility rate at year-end.
Source: Vanguard.
Energy drives our near-term inflation forecast
Notes: This chart shows estimates derived from the Vanguard European Macro Model (VEMM), using a system of Bernanke-Blanchard-style equations that link inflation, wages, labor market slack, and expectations to assess how supply shocks feed through to growth and prices.
Sources: Vanguard calculations, based on data from Bloomberg and Eurostat, as of June 4, 2026.
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