ECB: Recovery outlook and rate path – Societe Generale

Societe Generale economists see the Euro area entering the latest energy shock with improved resilience and reduced Oil and gas intensity. They expect Euro area GDP growth to run above potential, with resilient consumption and German fiscal stimulus, while projecting the European Central Bank (ECB) rate hikes in December 2026 and June 2027.

Resilient growth with gradual ECB tightening

"Europe enters the current episode of higher energy prices with greater resilience. It has significantly reduced its gas and oil intensity over the past decade. Our NiGEM simulations indicate that, in our baseline scenario, higher energy prices would reduce euro area GDP by only about 0.2–0.3pp."

"The euro area economy is emerging from a period of weakness, and in our baseline scenario for the conflict in Iran, we expect this recovery to gain traction, driven by German fiscal stimulus, resilient consumption, AI-driven investment and a housing recovery. We expect GDP growth to print above potential over the forecast horizon."

"We expect the euro area public deficit to rise from 3.1% of GDP in 2024 to approximately 3.4% in 2025 and 2026, reflecting a mildly accommodative fiscal stance. We see Germany’s public deficit rising from 2.4% of GDP in 2025 to 4.3% in 2026. Several other countries are likely to utilize their fiscal headroom during this period."

"Given that headline inflation is still expected to remain around 2% in 2027 and that uncertainty is heightened, we see no immediate need for ECB policy action. We maintain our call for a 25bp hike in December 2026 and another in June 2027."

"The risk to our call is that these hikes get brought forward when the next forecast rounds offer a better opportunity to assess the medium-term impact (June most likely)"

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)