Our economic outlook for the euro area
July 13, 2026
ECB to lean against inflation risks with additional hike
“We expect the European Central Bank to follow up its June rate hike with one additional hike this year. However, with inflation expectations well anchored and second-round effects likely to remain limited, we believe the need for restrictive policy should gradually diminish as the impact of the energy shock fades.”
Shaan Raithatha,
Vanguard Senior Economist
Our euro area outlook has improved modestly as oil prices below their recent peaks have reduced downside risks to growth and upside risks to inflation. High-frequency indicators suggest the peak impact of the energy shock is now behind us. June’s flash Purchasing Managers’ Index (PMI) survey showed easing input cost pressures, improving supply chains, and signs that growth momentum is stabilizing. We remain attentive to developments in the Middle East.
The shock has evolved broadly in line with our base-case scenario, leaving our 2026 GDP growth forecast unchanged at 0.8%. However, risks remain skewed to the downside given the weak first-quarter GDP print (–0.2% quarter over quarter) and contractionary PMI signals in the second quarter. A technical recession remains possible before growth recovers later in the year, supported by stronger domestic demand and German fiscal stimulus. We expect growth to rise to 1.3% in 2027 as energy and trade-related headwinds fade.
Inflation increased as expected following the energy shock. We expect headline inflation to remain around current levels and end 2026 at 3.3%, while core inflation moderates to 2.2%. Despite the rise in energy prices, we continue to view the risk of inflation expectations becoming de-anchored as low, reflecting a credible European Central Bank (ECB), moderating wage growth, and a less tight labor market than during the pandemic-era inflation surge of 2022. We expect headline inflation to fall back to 1.9% by year-end 2027, while core inflation will remain slightly elevated at around 2.3% due to persistent services pressures. Overall, we see limited evidence that the Middle East shock will generate material or persistent second-round inflation effects.
The ECB raised its deposit facility rate by one-quarter of a percentage point to 2.25% at its June meeting. We foresee it raising the rate to 2.5% before the end of the year.
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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