Our economic outlook for the euro area

German fiscal spending has picked up in recent months, which is starting to show up in both the hard and soft data. We continue to forecast that German fiscal policy will add 0.5 percentage points to German GDP and 0.2 percentage points to euro area GDP in 2026.

On the other hand, higher U.S. tariffs will continue to drag on growth. The proposed 15% U.S. tariff rate intended to replace tariffs that the U.S. Supreme Court ruled unconstitutional would increase the effective European Union (E.U.) tariff rate marginally, by 0.8 percentage points. We make no change to our assessment that higher tariffs will reduce euro area GDP by 0.3 percentage points in 2026.

Conflict in the Middle East and the potential for an extended spike in energy prices pose a risk to our outlooks. We estimate that a persistent 10% rise in energy prices would add 0.1 to 0.2 percentage points to headline inflation and trim 0.1 to 0.2 percentage points from GDP. Given these developments, we remove our downside bias to the balance of risks around our inflation and policy rate outlooks.

Europe continues to lag well behind in the first phase (innovation and investment) of the AI cycle. E.U. tech‑sector plans for capital expenditure in a range of $250 billion to $300 billion over the next two years remain far smaller than U.S. tech spending plans of greater than $2 trillion. Our view is that in the second phase of the cycle (adoption), AI adoption in Europe will be slightly slower and lower than in the U.S. Three main factors are that compared with the U.S., Europe has a larger share of smaller companies, more restrictive regulation, and a slightly lower share of services-oriented activities, which are most exposed to AI automation.