Our economic outlook for the euro area
September 15, 2026
Higher energy prices pose a hawkish risk for the ECB
“Our forecast has called for just two European Central Bank rate hikes this year. However, given recent growth resilience and escalating energy prices, risks are skewed toward additional monetary policy tightening.”
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 strength that has been broad-based across major economies and driven by domestic demand.
That said, we see only modest pass-through of German fiscal stimulus in the industrial production data so far. Spending on military equipment has accelerated in the last year, but this is only a small part of total production. More 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.
Within the labor market, the euro area unemployment rate remains remarkably stable at 6.4%. However, the aggregate headline masks significant divergence under the hood. German employment growth is outright negative amid unfavorable demographics and a continuing industrial recession, while the French labor market is undergoing cyclical weakness. This contrasts with the strong growth story in Spain, where the rate of job creation is exceeding the immigration-led increase in labor supply.
Regarding inflation, both crude oil and natural gas prices have moved higher in the past month. This, coupled with widening margins for refined fuel products, is raising the risks of second-round effects building into the system. The European Central Bank (ECB) announced a quarter-percentage-point increase of its policy interest rate to 2.5% on September 10, which represented its second hike of 2026. Our forecast has called for just two ECB rate increases this year. However, given recent growth resilience and higher energy prices, risks skew toward additional monetary policy tightening.
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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