June 25, 2025
“The chances of undershooting the European Central Bank’s 2% inflation target are rising. Soft global growth, a stronger euro, and lower energy prices all point to further disinflation ahead.”
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 fiscal package and greater defense spending throughout the European Union are more of a 2026 story. Risks are skewed toward a slower implementation or smaller package than our current baseline.
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, stronger euro, and lower energy prices all point to further disinflation ahead.
Following the messaging at the ECB’s June press conference, in which the president of the ECB repeatedly stated that the central bank was in a “good position” at the current policy rate level (2%), we think a pause at the July 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.
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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