Forecasters maintain inflation outlook, upgrade 2026 GDP amid easing uncertainty
In the European Central Bank's Survey of Professional Forecasters for Q1 2026, expectations for headline and core inflation remained unchanged. Real GDP growth for 2026 was revised up, while unemployment expectations were stable.
Inflation path holds steady, growth outlook brightens
Headline HICP inflation is expected to decrease from 2.1 percent in 2025 to 1.8 percent in 2026, before returning to 2.0 percent in 2027 and reaching 2.1 percent in 2028. Longer-term HICP inflation expectations for 2030 remained at 2.0 percent.
Core inflation (HICPX) is also unrevised, projected to fall from 2.4 percent in 2025 to 2.0 percent for 2026, 2027, 2028, and the longer term.
Factors exerting downward pressure on inflation include moderating wage growth, declining energy prices, a stronger euro, and competitive pressures from Chinese trade redirection.
Conversely, upward pressures stem from tight labour markets, increased defence/fiscal spending, and climate-related measures.
Real GDP growth expectations for 2026 were revised up by 0.1 percentage points to 1.2 percent, driven by better-than-expected Q3 2025 data, while 2027 (1.4 percent) and 2028 (1.3 percent) figures remained unchanged.
Longer-term GDP growth expectations are stable at 1.3 percent.
ETS2 and defence spending shape future projections
The survey included special questions on the impact of the expanded EU Emissions Trading System (ETS2) and defence/fiscal spending.
ETS2 is expected to have its strongest impact on baseline inflation expectations in 2028, adding 0.15 percentage points, with an average of 0.06 percentage points annually from 2027 to 2030. Its impact on real GDP growth is negative and much smaller.
Defence and fiscal spending are projected to have a stronger effect on real GDP growth, averaging 0.12 percentage points annually from 2026 to 2030, compared to 0.06 percentage points for inflation.
Uncertainty has generally eased across all variables, with unemployment uncertainty returning to pre-pandemic levels, though inflation and GDP uncertainty remain slightly elevated.
Upside risks to inflation include geopolitical developments, commodity prices, and higher-than-expected wage growth, while downside risks encompass weaker global demand and a stronger euro.
A fragile equilibrium in economic forecasts
The stability in inflation expectations, particularly for the longer term, offers a reassuring signal for price stability, yet the complex interplay of global and domestic factors highlights ongoing challenges.
While the upward revision for 2026 GDP growth is a positive development, the varied assessments of fiscal stimulus impact suggest lingering caution among forecasters.
The overall easing of uncertainty is welcome, but the persistent geopolitical risks and trade policy ambiguities underscore a delicate balance in the economic outlook.