The Conference Board Economic Forecast for the Euro Area Economy

The Euro Area (EA) economy is entering 2026 on a firm footing. Survey data collected through November point to growth maintaining momentum in Q4 after a 0.2% q/q expansion in Q3. The composite PMI remains in expansionary territory, with services gaining momentum in November (rising from 53.0 to 53.1) while manufacturing slipped back into contraction (from 50.0 to 49.7). The European Commission’s Economic Sentiment Indicator (ESI) rose for the fourth month in a row, to 94.7, also signaling a gradual, though still below average, improvement in business confidence. These readings broadly confirm our view about the bloc’s near-term outlook. Services should remain the main driver of growth in Q4 and into 2026, while factory output is likely to stay weak amid tariff-related headwinds, growing competitiveness from other countries like China, and structural challenges. Private consumption should also support growth, and even strengthen in 2026, as the labor market remains resilient, although high household saving rates and slower wage growth will keep the level of support contained. Government expenditure, buoyed by EU-backed funds and expansionary fiscal policies in key member states like  Germany will also support growth in 2026. More favorable financing conditions should help private investment gradually recover in 2026, especially if uncertainty continues to ease and progress on competitiveness resumes. Overall, the euro area economy is set to continue its recovery in 2026, growing from 1.0% in 2025 to 1.2% in 2026 and a stronger 1.3% in 2027.

November inflation edges up but remains close to the 2% target. Annual EA headline inflation rose to 2.2% in November, from 2.1% a month ago. The increase was almost entirely driven by energy, as energy prices fell less than a year earlier (-0.5% in November compared with -0.9% in October). Services inflation also picked up slightly, from 3.4% to 3.5%, while non-energy industrial goods and food inflation were unchanged at 0.6% and 2.5%, respectively. The November data give little reason to change our overall assessment of the EA inflation outlook. We continue to expect headline inflation to ease from 2.1% in 2025 to 1.9% in 2026, and core inflation to fall from 2.5% to 2.0% over the same period. By component, services inflation should gradually decelerate as wage growth moderates, food prices should continue to move back towards their pre-2022 trend, and inflation in non-energy industrial goods is expected to remain low and stable, restrained by stronger import competition and a strengthened euro.

The ECB is unlikely to move at its 18 December meeting. Recent macroeconomic data reinforce our view that the Governing Council will leave the deposit rate unchanged at 2.0% for a fourth consecutive meeting. Despite elevated uncertainty and geopolitical risks, EA growth improved in Q3 while inflation remained in line with the ECB’s 2% target. Risks to inflation remain two-sided but now appear more balanced than earlier in the year. First, geopolitical uncertainty has eased after recent EU-US and US-China trade deals, reducing noise around business activity. Second, EA growth prospects have improved, with momentum expected to strengthen in 2026 on the back of firmer domestic demand and fiscal support. Third, underlying price pressures, once persistently stubborn following the energy shock and its spillovers into wages and services, are easing and should continue to moderate as nominal wage growth slows and private spending strengthens gradually. Upside risks have not disappeared, however: Stronger defense and infrastructure spending or renewed price shocks (e.g., through supply disruptions) could reignite inflation and force the ECB to tighten its policy stance again. Assuming these risks do not materialize, and downside risks to growth and inflation remain contained, we see no reason to change our projections, which envisage policy rates remaining on hold throughout 2026.

Labor data remain resilient, but productivity is still the weak link. Revised October figures leave the bloc’s unemployment rate at 6.4% for a sixth consecutive month, while employment rose by 0.2% q/q in Q3 (after 0.1% in Q2, confirming steady labor demand and an overall resilient labor market. This jobs-led expansion remains crucial for the region’s near-term growth prospects. However, timelier productivity readings are soft, suggesting output gains continue to rely more on higher labor input than on a more efficient workforce. Hourly productivity growth in the EA, measured as real gross value added per total hours worked, fell by 0.1% in Q3 versus Q2 and has increased by only 2.3% cumulatively since Q4 2019. Country data show notable differences: productivity declined in Italy (–0.3% q/q) and Spain (–0.6% q/q), was flat in Germany, and rose by 0.5% in France, likely owing to cyclical factors. Without a stronger and more sustained pickup in productivity in the coming quarters, growth will continue to rely on hiring, putting greater pressure on business profits and potentially limiting the durability and quality of the EA’s economic recovery.

We highlight two downside risks to the EA/EU’s growth outlook that could materialize in 2026:

• An AI-related market correction in 2026 would have important implications for the euro area economy. Concerns about an AI-related bubble have grown as valuations soar and market gains become heavily concentrated in a small group of US tech giants. Valuations of leading AI-linked companies (e.g., OpenAI, Nvidia, Oracle) have risen much faster than their earnings, while debt-financed investment in chips and data centers has reached record levels. Although most AI-focused funds and bonds are originated in the US, Morningstar data show that European investors hold a large share of this exposure, with Europe accounting for about $22.7bn of the $38.1bn in global AI and big data fund assets as of early 2025. As a result, a market correction starting in the US would spill over to Europe through several channels given EU banks, insurers and pension funds hold significant amounts of US tech equities and corporate bonds, so falling prices would weaken balance sheets and undermine household wealth. Lower expected returns on AI would also reduce demand for European capital goods and industrial equipment used in AI infrastructure, weighing on exports and investment in advanced EU manufacturing hubs. The question remains as to whether such a correction would trigger a more systemic crisis both in the US and in Europe, but, regardless, it would affect growth and investment across the region.
• The White House’s new National Security Strategy is widening the gap between Brussels and Washington. The release of a new document has received intense responses from leading European public figures and is considered an unprecedented act of interference in domestic issues. France has called the doctrine an “extremely brutal clarification” of the new US strategic thinking, while the German chancellor branded parts of it as “unacceptable”. This sharp US strategic statement further strains a relationship already tested by recent tariffs and industrial disputes, reinforcing the need for Europe to step up its efforts to increase defense spending and capacity, and build greater strategic autonomy. We expect this to weigh heavily on transatlantic relations in 2026.