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Euro area: Lower growth and higher inflation

Danske Research Team Danske Bank A/S

The energy price shock stemming from the war in Iran is likely to push inflation higher and dampen growth. However, as the macroeconomic environment now differs markedly from that in 2022, we expect the overall impact on the economy to be considerably more moderate.

We revise our 2026 GDP growth forecast down to 0.7% y/y from 1.2%, and our 2027 projection to 1.2% y/y from 1.4%. We expect inflation to average 3.0% y/y in 2026 and 2.3% y/y in 2027. Given the softer labour market and moderating wage growth, we see limited risk of pronounced second-round effects. Against this backdrop, we only expect the ECB to raise policy rates by a total of 50bp in 2026, before lowering the deposit rate back to 2.0% by summer 2027.

Risks are significant and are mainly driven by the outlook for energy prices. We see risks tilted to the upside for inflation and downside for growth while our ECB outlook is seen as broadly balanced.

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Author

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

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Euro area: Lower growth and higher inflation

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