Our economic outlook for the euro area
January 13, 2026
ECB to keep rates at 2% throughout 2026
“Don’t expect a strong AI-driven investment impulse in 2026. We anticipate that capital expenditure from Europe’s tech sector over the next two years will be no more than $300 billion, well below the $2 trillion expected in the United States.”
Shaan Raithatha,
Vanguard Senior Economist
The euro area has experienced a soft landing. Annual inflation ended 2025 at the 2% target set by the European Central Bank (ECB) after peaking above 10% in late 2022. Meanwhile, the economy is growing close to its potential, and the unemployment rate is at its lowest sustained level since the creation of the euro in 1999. The ECB halted its easing cycle in June 2025, leaving the deposit facility rate at 2%, down from a peak of 4% in 2024. We expect it to stay at 2% throughout 2026.
Meanwhile, fiscal policy is taking center stage. Germany is now set to run annual budget deficits of close to 4% of GDP over the next decade. Additionally, defense spending across the European Union will ramp up this year and is expected to meaningfully contribute to growth.
However, we do not expect a strong AI-driven investment impulse in 2026. Anticipated capital expenditure from the European Union’s tech sector over the next two years is around $250 billion to $300 billion, compared with over $2 trillion in the U.S. Accordingly, we expect real private investment growth of just 2% in the euro area in 2026, compared with 7% in the U.S.
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 2026. 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 2026. Monetary policy is the European Central Bank’s deposit facility rate at year-end.
Source: Vanguard.
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