Our economic outlook for the euro area
October 07, 2026
Energy shock’s second wave implies additional ECB hikes
“A resurgence in energy prices is adding to inflationary pressures, and that’s likely to keep the European Central Bank in a rate-hike mode.”
Shaan Raithatha,
Vanguard Senior Economist
Despite the energy shock stemming from conflict in the Middle East, economic activity in the euro area has proved resilient. Growth is tracking above our 0.8% forecast for 2026, with stellar performance from Spain and strong growth in Germany and Italy offsetting continued poor data out of France.
That said, we see only modest pass-through of German fiscal stimulus in industrial production data so far. Prominent sectors that should be exposed to infrastructure-related spending—including construction, basic metals, and machinery and equipment—have yet to experience a material upswing. Further, bond market downturns are putting pressure on government finances ahead of key elections in France, Italy, and Spain next year, exacerbating fiscal risks.
Gas prices have risen, while crude oil prices have moved back toward recent peaks amid tight refining capacity. This is raising the risks of second-round effects building into the system, with survey data suggesting firms are experiencing stronger underlying price pressures. We anticipate that this will keep the key signal of core inflation elevated around 2.5% through 2027, higher than the 2% headline inflation target set by the European Central Bank (ECB), even amid signs of stabilizing wage growth.
The ECB announced a quarter-percentage-point increase of its policy interest rate to 2.5% on September 10, its second hike of 2026. Given our expectation of elevated inflation in the near term, we expect a further hike this year and another in early 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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