The Conference Board Economic Forecast for the Euro Area Economy

Resilient growth momentum as the bloc enters the final months of the year, but can it last? The Euro Area (EA) economy proved more resilient than expected in the first half of 2026. Excluding Ireland’s volatile multinational-related data, GDP expanded by 0.2% quarter-on-quarter (q/q) in Q1, before accelerating to 0.3% in Q2, even as tensions in the Middle East and energy prices intensified. Exports were the main driver of activity, with public spending and household consumption providing additional support, while fixed investment remained weak as businesses continued to face volatile energy prices and elevated geopolitical and policy uncertainty. Growth nevertheless remains uneven across countries. Spain maintained its strong expansion, with GDP rising by 0.7% q/q in Q2, while Italy recorded comparatively resilient growth of 0.2%. Germany and France stood out for very different reasons.

Germany: A recovery begins, but its foundations remain narrow
Germany was one of the main beneficiaries of the EA’s export-led momentum in H1. Stronger exports and an improvement in industrial activity helped GDP expand by 0.3% q/q in Q2—the economy’s third consecutive quarter of growth. The momentum is important. It provides the clearest evidence that Europe’s largest economy is at last emerging from the prolonged stagnation that followed the pandemic and the 2022 energy crisis. However, is this a sustained recovery? Domestic demand remains weak, particularly private consumption and business investment, meaning that public spending, exports and manufacturing will need to continue doing much of the heavy lifting. As a result, the rebound remains unusually exposed to energy developments. Rising oil and gas prices, record-low gas storage levels and an adverse winter could raise industrial input costs and erode the recent improvement in manufacturing. Germany’s outlook has strengthened since last quarter. We now expect growth to be slightly above 1% for 2026 and 2027, a meaningful upgrade from our more pessimistic forecast of 0.6% just a few months ago. However, the risk of the economy slipping back into stagnation remains significant.

France: Political and fiscal uncertainty deepen the slowdown 
Contrary to Germany, France continued to underperform in Q2. Following a contraction of 0.2% q/q in Q1, GDP stagnated in Q2, narrowly avoiding a technical recession. The weakness was not broad-based, as household consumption recovered, albeit modestly, and net exports supported activity. However, investment contracted again, inventories weighed heavily on growth and underlying domestic momentum remained subdued. The outlook is further clouded by fiscal and political uncertainty. Public debt is on track to reach 120% of GDP (the third largest in the EA), while the deficit is unlikely to fall below 5% in 2027. A hung French parliament will find it much harder to agree on a credible consolidation program, leaving households and businesses uncertain about the timing and composition of future tax increases or spending cuts. The 2027 presidential election makes meaningful fiscal progress even less likely in the near term. In light of heightened domestic and external uncertainty, we have downgraded our forecast for the French economy and now expect output growth of just 0.4% (from 0.6% a few months back) in 2026 and 0.7% in 2027, well below the EA average.

Higher inflation prompts an ECB rate increase, while energy risks complicate the path towards easing in 2027. Rising energy prices pushed EA inflation to 3.2% year-on-year in August, up from 2.9% in July. This prompted the ECB to increase its deposit facility rate by another 25 basis points, to 2.50%, at its September meeting. We do not expect the ECB to tighten further. The latest increase in headline inflation was overwhelmingly energy-driven, while underlying price pressures continued to moderate. Core inflation declined to 2.4% in August, from 2.5%, and services inflation fell to 3.0%, from 3.3%. Wage pressures are also considerably weaker than during the previous inflationary episode. The ECB’s wage tracker points to negotiated wage growth (excluding one-off payments) of around 2.5–2.6% in the second half of 2026—broadly stable and well below earlier peaks. Combined with weak domestic demand and sluggish investment, this should make further tightening difficult to justify unless clear second-round effects begin to emerge. Nevertheless, higher oil and natural gas prices, coupled with a renewed pickup in food inflation, could make the ECB’s easing path in 2027 less comfortable. We now expect the deposit rate to decline only gradually, reaching 2.25% by the end of 2027. A quicker and more durable de-escalation in the Middle East, accompanied by a sustained reversal in energy prices, would be the main condition for faster easing.

The labor market remains robust, but signs of cooling intensify. The EA labor market remained resilient through the summer, with unemployment close to its record low at 6.4%. However, employment growth slowed to 0.5% y/y in Q1 and Q2, the weakest pace since the pandemic, as manufacturing job losses continued and private-sector hiring cooled. Further modest increases in unemployment cannot be ruled out either. Major economies, especially Germany, continue to reduce industrial employment (-2.4% y/y), France is scaling back apprenticeship support due to fiscal retrenchment, and the expiry of EU-backed, RRF funds at the end of 2026 is likely to dampen hiring intentions, particularly in the economies most reliant on this funding (e.g., Italy). Productivity growth (real GVA per hour worked) increased modestly in H1, driven largely by workforce adjustments in trade-exposed sectors and stronger output growth in cyclical export-oriented industries. Looking ahead, the labor market should remain resilient, but increasingly less dynamic. Hiring intentions have stabilized, unemployment remains historically low and persistent shortages should discourage widespread layoffs.

Risks to the outlook: Energy and trade in the (very) near-term, politics next:

• Energy remains the main near-term downside risk to growth and upside risk to inflation. Higher natural gas prices could weaken industrial output, raise electricity and fertilizer costs and—alongside heat-related crop losses over the summer—lift food inflation materially in 2027. 
• Trade uncertainty is also increasing again. The US has threatened further tariffs if the EU proceeds with associate membership for Canada. Meanwhile, growing Chinese import competition will continue to put pressure on Europe’s market share, industrial margins and production. The EU’s goods deficit with China now approaches €1 billion per day. 
• Beyond economic factors, political uncertainty will take center stage in 2027, when eight EU countries hold major national elections. Electoral campaigns in France, Italy, Poland and Spain could have consequences well beyond national politics. Growing support for populist and anti-establishment parties may weaken fiscal discipline and delay consolidation. Greater political fragmentation could also make agreement on key EU priorities, including budgetary rules, competitiveness reforms and foreign and industrial policy more difficult in the years ahead.