Eurozone: Resilient growth, worrying inflation – ABN AMRO

ABN AMRO economists Bill Diviney and Jan-Paul van de Kerke expect Eurozone growth to remain resilient despite a renewed energy shock, supported by German fiscal spending and solid underlying activity. They have reverted to a 0.8% growth forecast for 2026 and kept 2027 at 1.2%, while warning that higher and more persistent inflation raises risks of second-round effects and further European Central Bank (ECB) tightening.

Growth holds as inflation pressures rise

"Growth is likely to stay resilient despite the resurgent energy shock, but inflation has become a worry. The longer high energy prices persist, the bigger the risk of second round effects… and the bigger the risk the ECB might have to tighten beyond next week’s expected rate hike."

"We expect that resilience to broadly continue in the quarters ahead, despite the renewed energy shock. While the consumption recovery is likely to see renewed headwinds from the hit to real incomes, German fiscal spending is expected to continue to support a recovery in the eurozone’s biggest economy, and this should remain a key pillar supporting the region. All told, the strength in Q2 alongside Germany’s upward revisions have led us to revert back to our 0.8% growth expectation for 2026, while keeping our 2027 forecast at 1.2%."

"Indeed, the resurgent energy shock is likely to leave a much bigger mark on inflation. Headline inflation has already rebounded from its June trough of 2.8% to reach a three year high of 3.3% in August. The rise was driven almost entirely by energy, although goods inflation picked up notably as well – something we had flagged in our Monthly just prior to the summer."

"Inflation is now expected to peak above 3.5% over the coming months, and to average 3.0% in 2026 – 0.5pp higher than our June forecast. The rebound in inflation will sharpen the focus on second round effects, and particularly wage inflation. We saw the first warning signs of a pickup in wage growth with the Indeed monthly data for July, but the ECB’s forward-looking tracker for negotiated wages has also picked up in recent months."

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