Euro area GDP growth raised to 0.9 percent amid energy price shock
ECB staff have raised the euro area real GDP growth projection to 0.9 percent for 2026, while projecting headline inflation to peak at 3.0 percent before easing to 2.1 percent in 2028. The September forecast attributes resilience to strong domestic demand and German fiscal spending.
Resilience lifts the growth baseline
The baseline macroeconomic projections project euro area real GDP growth at 0.9 percent in 2026, 1.4 percent in 2027 and 1.5 percent in 2028, reflecting upward revisions of 0.1 percentage points for 2026 and 0.2 percentage points for 2027.
Headline HICP inflation is projected to average 3.0 percent in 2026, reaching a peak of 3.6 percent in the fourth quarter, before decelerating to 2.5 percent in 2027 and 2.1 percent in 2028.
Core inflation, excluding energy and food, is seen at 2.5 percent in 2026, 2.6 percent in 2027 and 2.3 percent in 2028.
The labor market remains robust, with the unemployment rate projected to drop from 6.2 percent in 2026 to a historical low of 5.9 percent by 2028.
Geopolitics and fiscal tailwinds
Geopolitical conflict in the Middle East and the closure of the Strait of Hormuz drive substantial energy volatility, pushing refining margins and wholesale gas prices higher.
Growth is cushioned by rising German infrastructure and defence spending, which adds a cumulative 0.5 percentage points over 2025-28. However, ECB staff warn of severe downside risks: an escalated severe scenario with persistent energy supply losses would see inflation surge to 5.4 percent and reduce GDP growth to 0.4 percent in 2027.
Optimism built on fragile assumptions
The baseline relies on heroic optimism that geopolitical supply shocks will rapidly dissipate.
With core inflation lingering at 2.6 percent in 2027, the Governing Council faces very narrow room for policy easing.
The severe scenario exposes how fragile this disinflation narrative really is.