Our economic outlook for the euro area
July 23, 2025
Germany’s fiscal stimulus bolsters growth outlook
“We are encouraged by the latest German fiscal plan, which largely eliminates short-term implementation risks. We, therefore, have shifted our balance of risks regarding the outlook for growth from ‘skewed to the downside’ to ‘broadly balanced.’”
Shaan Raithatha,
Vanguard Senior Economist
We expect growth in the euro area to track around 1% in both 2025 and 2026, slightly below trend. Softening global activity, driven partly by elevated policy uncertainty and higher tariffs, is expected to weigh on final demand. The tailwinds from Germany’s recent fiscal package and greater defense spending across the European Union are more of a 2026 story. Short-term implementation risks surrounding German fiscal policy have now receded.
The chances of undershooting the 2% inflation target set by the European Central Bank (ECB) are rising. Both wage growth and services inflation are now falling meaningfully. And a weakening global growth outlook, coupled with a stronger euro and lower energy prices, points to further disinflation ahead.
Following the messaging at the ECB’s June press conference, in which the ECB president repeatedly stated that the central bank was in a “good position” at the current policy rate level of 2%, we think a pause at the July 24 meeting is now likely. We forecast just one more rate cut this cycle, likely in September, which would leave the policy rate at 1.75%, a touch below our estimate of neutral (2–2.5%). The balance of risks is skewed toward further easing.
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 2025. 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 2025. Monetary policy is the European Central Bank’s deposit facility rate at year-end.
Source: Vanguard.
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