The European Central Bank has upgraded its growth projections for the euro area, now expecting real GDP to expand by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. While the inflation forecast for 2026 holds steady at 3.0%, the outlook for 2027 and 2028 has been revised upward to 2.5% and 2.1% respectively, signalling that the impact of the energy shock may linger well into next year.
Economic performance is proving more resilient than previously anticipated.Following the June assessment, the ECB has raised its 2026 growth estimate from 0.8% to 0.9% and lifted the 2027 projection from 1.2% to 1.4%, while maintaining the 2028 figure at 1.5%. The upgrade largely reflects the euro area's stronger-than-expected capacity to absorb the effects of Middle East conflicts and energy market disruptions. Actual GDP growth in the second quarter of 2026 exceeded earlier estimates, and recent survey data points to sustained short-term momentum as uncertainty fades and business confidence improves. Private consumption, government spending, and investment remain the primary pillars of expansion.
The central bank anticipates that infrastructure and defence outlays, particularly those linked to Germany, will add roughly 0.5 percentage points to cumulative economic growth between 2025 and 2028. Investment tied to artificial intelligence is also expected to bolster business spending and external demand. However, the euro area's export sector continues to face headwinds from declining competitiveness, US tariffs, and the earlier appreciation of the euro. Moreover, trade benefits stemming from rising global AI demand may disproportionally favour economies with a larger share of hardware production.
The inflation forecast for 2026 remains unchanged.The ECB projects that euro area harmonised consumer price inflation will climb from 2.1% in 2025 to 3.0% in 2026, before easing to 2.5% in 2027 and 2.1% in 2028. Compared with the June projections, the 2026 figure is unchanged, but the 2027 estimate has been revised up by 0.2 percentage points and the 2028 forecast by 0.1 percentage points. Lower-than-expected food prices have offset the upward pressure from energy costs, leaving the full-year 2026 outlook intact. The upward revisions for 2027 and 2028 are attributed to a more prolonged energy inflation path, improved economic activity, and slightly stronger wage growth. Core inflation, which excludes energy and food, is projected at 2.5% in 2026, 2.6% in 2027, and 2.3% in 2028.
Energy prices will determine the pace of disinflation.The ECB expects headline inflation in the euro area to peak at 3.6% in the fourth quarter of 2026, driven by higher energy costs stemming from the Middle East conflict. As the high base effects from energy price increases gradually drop out of year-on-year calculations, inflation is forecast to decline to 2.5% by the second quarter of 2027 and then drift closer to the 2% target. These projections rest on the assumption that the energy shock will fade over time.
The central bank cautioned that the Middle East conflict, potential disruptions to the Strait of Hormuz, and volatile energy prices leave the economic outlook subject to considerable uncertainty. Under a severe shock scenario, inflation could reach 5.4% in 2027 while growth could slow to 0.4%. Conversely, if energy prices normalise at a faster pace, inflation might fall to 1.9% in 2027 with growth reaching 1.5%. Given this landscape, the ECB reiterated that it will continue to set monetary policy on a meeting-by-meeting basis, guided by the latest economic data.