Research Euro area: A resilient economy
- The euro area economy has proved more resilient than expected despite higher energy prices and unusually high uncertainty.
- We revise up our growth forecast for 2026 and 2027, supported by stronger manufacturing, AI-related demand and more fiscal stimulus.
- Inflation is still mainly driven by energy, while broader price pressures remain absent as wage growth slows and consumers stay cautious, limiting passthrough.
- We expect the ECB to hike policy rates once more in September and keep the deposit rate at 2.50% through 2027, with risks viewed as balanced.
The euro area economy has performed better than expected despite the sharp rise in energy prices. The conflict in Iran has raised costs for companies and pushed up consumer prices, but growth has remained close to potential. So far, inflation has mainly been energy-driven rather than spreading broadly to other goods and services. We are therefore slightly more positive on the outlook than before and now expect ECB policy rates to stay higher in 2027. However, uncertainty is unusually high, especially as the outlook depends heavily on energy prices. Our forecast assumes that energy prices broadly follow current futures markets.
We expect euro area GDP to grow by 0.8% in 2026, up from 0.7% in our previous forecast, and by 1.4% in 2027, up from 1.2%. Manufacturing is recovering more strongly than expected, with higher new orders supporting production. One driver is the rapid increase in global investments in artificial intelligence. European companies are not directly leading these investments, but many firms indirectly supply equipment, components and infrastructure needed for e.g. data centres and power systems. Fiscal policy is also providing more support, especially as German public spending has increased markedly, and France is tightening less than expected. These parts of the economy are less interest-rate sensitive, making growth more resilient despite higher ECB policy rates next year.
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.
