Euro area GDP growth revised down, inflation up by staff
Eurosystem staff have revised down their GDP growth projections for the euro area for 2026 and 2027, while significantly revising up headline inflation. The June 2026 projections reflect the protracted impact of the Middle East conflict and rising energy prices.
Growth outlook dims, inflation flares
The June 2026 Eurosystem staff projections foresee annual real GDP growth of 0.8 percent in 2026, 1.2 percent in 2027, and 1.5 percent in 2028.
Compared with the March 2026 projections, GDP growth has been revised down by 0.1 percentage points for both 2026 and 2027, reflecting the stronger than previously expected impact of the war in the Middle East.
Headline inflation, measured by the Harmonised Index of Consumer Prices (HICP), is projected to peak at 3.4 percent in the third and fourth quarters of 2026, remaining above 3.0 percent until early 2027.
It is then expected to fall sharply to 2.3 percent in the second quarter of 2027 and hover around 2.0 percent thereafter.
Overall, HICP inflation is projected to pick up from 2.1 percent in 2025 to 3.0 percent in 2026, before declining to 2.3 percent in 2027 and returning to target at 2.0 percent in 2028.
The outlook for HICP inflation has been revised up by 0.4 percentage points for 2026 and 0.3 percentage points for 2027, largely due to higher energy and food price assumptions.
The Middle East's economic shadow
The euro area's economic outlook faces high uncertainty from the Middle East conflict, Strait of Hormuz closure, and oil price volatility.
Risks identified in March 2026 have materialized, with rising oil prices and emerging supply chain pressures, weighing on domestic demand.
This leads to subdued short-term growth, as household consumption slows significantly due to eroded real disposable income and dampened sentiment.
The baseline assumes rapid energy price declines, but the conflict's evolution and its pass-through to non-energy consumer prices remain highly uncertain.
Export growth is also constrained by persistent competitiveness challenges.
Medium-term domestic demand is expected to recover, supported by falling energy prices and a resilient labor market.
Uncertainty's stubborn grip
The projections highlight the euro area's vulnerability to geopolitical shocks, pushing price stability further out.
While the baseline assumes a rapid resolution, the significant upward revision to inflation underscores the persistent risks.
This implies central bankers will remain cautious, with any easing contingent on a clear de-escalation of global tensions.