The Conference Board Economic Forecast for the Euro Area Economy

Euro Area growth in line to pick up in 2026. After around 1.0% growth in 2024 and 2025, activity is on track to accelerate in 2026. Recent survey indicators point to some softening in sentiment, but the hard data remain encouraging. The EA composite Purchasing Managers’ Index (PMI) eased in December to 51.5 from 52.8 in November, with the deterioration concentrated in manufacturing (48.8 from 49.6), while services continued to support expansion. Industrial momentum has also improved: industrial production rose 0.8% month-on-month in October, the second consecutive gain. Credit dynamics are also gradually turning more supportive, with ECB lending survey data showing demand for loans to large non-financial corporations remaining positive. On the consumer side, confidence edged down in December to -14.6, but retail trade volumes held steady in October and were 1.5% higher than a year earlier, consistent with household spending holding up into late 2025. Against these backdrops, the balance of evidence points to continued expansion in Q4. Looking ahead, a more supportive fiscal impulse in Germany from 2026 onwards, and continued deployment of EU recovery funding should add to the momentum. With nominal wage growth still elevated and inflationary pressures broadly contained, private consumption should become a firmer driver of growth. Improving domestic demand would also help to partly offset a more challenging external environment, as rising competition from China and broad-based tariffs from the US will weigh more on European exports. We therefore maintain our view that EA growth in 2026, will edge up from 1.0% in 2025 to 1.2% in 2026, and then 1.3% in 2027.

December inflation returns to target. Annual EA headline inflation fell to 2% in December, from 2.1% a month ago, bringing it back to the ECB’s target. Core inflation (excluding food and energy) also eased to 2.3% from 2.4%, helped by a modest cooling in underlying price pressures. Services inflation edged down to 3.4%, while annual non-energy industrial goods prices fell more than expected to 0.37% (from 0.53% in November). Energy inflation fell deeper into negative territory, to -1.9% y/y (from -0.5% in November), while food inflation increased to 2.6% y/y (from 2.4% in November). Overall, the December release does not change our assessment of the EA inflation outlook. We still expect inflation to ease over the forecast horizon, as services price pressures gradually cool with moderating wage growth and goods inflation remains subdued amid import competition.

We see no change in the ECB’s monetary policy stance in 2026, although a still volatile international environment means this cannot be ruled out. At its December meeting, president Lagarde reinstated that EA inflation is in “a good place”, and recent data broadly support this assessment. Inflation has returned to the ECB’s 2% objective, and staff projections continue to show inflation close to target over the near term. The EA also weathered trade uncertainty in 2025 better than expected, and the growth outlook for 2026 and 2027 has edged to the upside. These factors should allow the ECB to keep its policy steady, while monitoring developments closely. Risks to inflation remain two-sided: renewed supply shocks, driving up energy or import prices, or a more inflationary fiscal impulse could push inflation higher, while a weaker-than-expected growth backdrop would reopen the debate about easing. Overall, we expect rates to remain unchanged in 2026 unless the balance of risks shifts materially.

November unemployment comes in lower than expected. The EA jobless rate declined to 6.3% in November, down 0.1 percentage points from October. In level terms, the number of unemployed declined by around 71 thousand, leaving total unemployment just above 10.9 million. Across major economies, unemployment remained unchanged in Germany (3.8%) and France (7.7%) and even fell further in Italy (5.7%) and Spain (10.4%). Overall, the November print reinforces the resilience the EA jobs market has been the case for quite some time, despite geopolitical tensions, sluggish output growth and elevated business uncertainty. A strong labor market remains an important support for the region’s economic recovery in the quarters ahead.

We highlight three things to watch in 2026:

• US threats to annex Greenland add more fuel to geopolitical tensions. Shortly after the US’s military operation in Venezuela the US rhetoric over “acquiring” Greenland has reemerged. Lying between the North Atlantic and Arctic Oceans, Greenland is a semi-autonomous territory of the Kingdom of Denmark, with a population of just under 60,000. Rich in (largely untapped) rare earths and critical minerals and located in a strategically important corridor between Europe and the US, the island features prominently in US arguments that its control has become a national security priority in the Arctic corridor.,  Coming after a period of heightened transatlantic frictions over tariffs, industrial and foreign policy, this escalation further complicates EU–US relations by calling into question the territorial integrity of Denmark, a NATO ally. European allies are reportedly discussing contingency responses should US pressure intensifies.
• Industrial activity in the Euro Area is gaining momentum—will it last? Industrial production rose for a second consecutive month in October (up about 0.8% month on month), marking one of the strongest readings since mid-2023. This continues an 11-month streak of positive annual growth, reversing a slump that lasted from May 2023 to December 2024. The strongest month-on-month gains came from Germany (+1.3%), Spain (+0.9%) and France (0.2%). It is still too soon to conclude whether the recent improvement reflects base effects from strong activity earlier in the year. However, the latest releases provide some evidence that the EA industry may be bottoming out—an important hypothesis to monitor closely in the months ahead.
• Italy’s 2026 budget approval leaves little room for faster growth in 2026. Italy’s lower house approved in December a deficit-cutting budget of €22 billion that aims to narrow the deficit to 2.8% of GDP in 2026 (from -3.4% in 2024 and a projected 3.0% in 2025). The budget, among others, includes a tax cut (from 35% to 33%) for lower incomes and €3.5B in support measures for struggling industries. Italy’s high debt burden (projected to surpass 137% in 2026), leaves little room for a growth-boosting fiscal impulse, overall signaling a budget that is more geared toward fiscal consolidation than materially lifting the growth outlook 2026. As a result, Italy is likely to remain among the slowest-growing economies in the common currency bloc, with growth expected at just 0.7% in 2026.