The Conference Board Economic Forecast for the Euro Area Economy

Flash Q4 growth estimates confirm Euro Area’s economic resilience. In line with our forecasts, the Euro Area economy expanded by 0.3% quarter-on-quarter (q/q), demonstrating its ability to withstand a turbulent 2025. All four major economies recorded growth. Germany grew by 0.3% q/q supported by stronger public and private consumption, ending 2025 with annual growth of 0.2% after the mild recession of 2023-2024. Italy also expanded by 0.3% q/q, while France posted a more modest 0.2% as the strong export contribution seen in Q3 waned and domestic demand remained weak. The Spanish economy continued to outperform peers and beat expectations with solid, broad-based growth of 0.8% in Q4, maintaining its role as the EA’s main growth engine. Finally, the Netherlands also exceeded expectations, achieving back-to-back quarterly growth of 0.5%. Overall, the EA economy ends 2025 on a stronger-than-expected footing, avoiding the feared impact of US tariffs.

Looking forward, growth should strengthen further in 2026 and remain firmer in 2027. The positive surprise late in 2025 improves the starting point for this year, and early data suggest the EA economy is building momentum. January survey indicators and hard data point to improving business and consumer confidence. Manufacturing appears to be bottoming out and stabilizing, with industrial production output improving and volumes of export on a gradual increase. At the same time, household demand continues to recover, as improving expectations about future financial conditions and easing inflation support real incomes and spending. Services activity also stayed in expansionary territory according to latest sectoral PMI readings. All in all, the EA’s near-term outlook looks brighter than a month ago. As a result, after 1.1% growth in 2025, the EA economy is now projected to grow by 1.3% in 2026 and a slightly stronger 1.4% in 2027.

Inflation falls below the ECB’s target in January. Annual headline inflation in the EA fell to 1.7% in January, below the ECB’s 2% medium-term target. Lower energy prices than a year ago are responsible for much of January’s below-target reading. They declined by almost 4% year-on-year (y/y), while annual food inflation increased from 2.6% in December to 2.8% in January. Core inflation, which excludes the more volatile items of energy and food and is a better gauge of domestic price pressures, also fell from 2.4% a month ago to 2.2%, the lowest reading since September 2021. At the country level, annual inflation stabilized in Germany at 2.1%, but fell steeply in Spain (2.4%, down from 3%), Italy (1.1%, down from 1.3%) and France (0.4%, down from 0.7%). January’s inflation figures confirm a disinflationary environment, with energy prices turning more negative and services inflation softening. We still expect inflation to average around 1.8%-1.9% in 2026 and 2027, broadly in line with the ECB’s latest projections. The appreciation of euro adds an extra layer of uncertainty to the inflation outlook. If it persists, or even intensifies, inflation could stay lower for longer. On the other hand, stronger public demand, most notably from Germany’s multi-year fiscal push, could support activity and keep inflation closer to levels the ECB is more comfortable with.

ECB holds rates in February, but a stronger euro is now making Lagarde’s ‘good place’ less comfortable. The ECB kept its main policy rates unchanged at its February 5 meeting, with the deposit rate stable at 2%, and president Lagarde reiterating that rates are “in a good place”. However, we think this narrative has started to feel less comfortable as the euro’s sustained appreciation against the dollar adds downward pressure on inflation and tightens financial conditions, even at the margin. The ECB  never sets its monetary policy on exchange rate dynamics, but it does monitor its macroeconomic consequences. If a stronger euro were to materially reinforce the disinflationary path and/or weigh on activity, the ECB would have to respond with additional rate cuts in order to safeguard its medium-term inflation target and growth outlook. For now, we keep our policy-rate projections unchanged at 2% for the remainder of the forecast horizon, but the list of downside risks to the inflation outlook has now grown. Weaker activity or further declines in inflation expectations would substantially increase the likelihood of additional cuts in the coming quarters.   

Unemployment rate in the Euro Area returns to its record low in January. The jobless rate in the common currency bloc fell back to its historic low of 6.2%. Unemployment was broadly unchanged across the largest EA economies, remaining close to their respective all-time lows, and even declined further in Spain from 10.1% a month ago to 10.0%. Employment expectations in the European Commission’s surveys remain below their long-term average and point to very mild pessimism, but this is more likely to result in slower hiring than a sharp rise in unemployment in the near term. In this context, the latest labor market data continue to underscore the resilience of the EA’s jobs market.

Opportunities and risks for the EA’s economic outlook in 2026:

• Lower domestic uncertainty could help the euro area build stronger momentum in 2026. Germany’s fiscal pivot is becoming more tangible, with parts from its 12-year €500bn special fund for infrastructure and climate neutrality now feeding through to the real economy. In France, the 2026 budget has finally been adopted. The minority government, after surviving three no-confidence votes, finally passed it, eventually reducing the risk of a prolonged fiscal stalemate and targeting a deficit of 5.0% of GDP in 2026 (from 5.4% in 2025). Spain also remains a bright spot. Unemployment has fallen to its lowest level since 2008, and the ongoing regularization of immigrants will support labor supply and formal employment. On top of that, the newly launched “Spain Grows” fund, aiming at sustaining investment momentum as EU-backed financing wanes by early 2027, should help maintain broad-based growth in the near-term. Taken together, these steps can further support demand, provided external risks do not escalate.
• A stronger euro, if it were to continue, could exert downward pressure on the EA economy. As of February 5, the euro is trading at about $1.18 per US dollar, with the currency’s real effective exchange rate against a basket of trading-partner currencies, the US dollar included, being in January 5.3% higher than a year ago. If this appreciation persists, it could weigh on activity as a stronger euro reduces the price competitiveness of EA exporters. This is important because EA’s large exposure to external demand (extra-EU exports account for roughly 20% of GDP) means weaker export growth could drag on output, investment and hiring decisions. This risk becomes even more relevant for the US market, which accounts for almost a fifth of exports to the US. A firmer euro, combined with higher tariffs would be a double-whammy for EA exporters, further eroding European firms’ competitive position in the US.