The Conference Board Economic Forecast for the Euro Area Economy

Iran and the US reach an agreement, extending the ceasefire by 60 days. Qatar and Pakistan, the two key mediators throughout the talks, confirmed on June 14^th that both sides had agreed to the framework. Though details about the agreement are not public yet, the deal includes reopening the Strait of Hormuz, while the US would lift its naval blockade of Iranian ports, and create a 60-day window for further negotiations on Iran’s nuclear program. Markets reacted swiftly to the positive news, with Brent crude oil now trading below $80/barrel and Dutch TTF gas prices at around €43/MWh, roughly 13% and 11% below their respective average prices a week earlier. If implemented, the agreement would represent a material upside risk to the Euro Area’s (EA) growth outlook by helping to restore some of the business and consumer confidence needed to support stronger activity in the coming quarters. Energy prices are unlikely to normalize within months, meaning inflationary pressures will persist in the near term, however, a durable de-escalation would still reduce one of the key downside risks currently weighing on the EA outlook.

 “Leprechaun economics” is back in focus. Revised data show that EA GDP contracted by 0.2% q/q in Q1 2026, a sharp downgrade from the flash estimate (+0.1%). Ordinarily, such a reading would signal a material deterioration, but as in past cases the move is largely statistical. The revision stems almost entirely from Ireland, where GDP fell by 12% q/q, driven by a collapse in pharmaceutical exports linked to multinational activity and post?US tariff adjustments. In fact, using alternative measures that strip out foreign companies’ activity show that domestic Irish activity remained resilient in Q1, with growth of around 0.4%, broadly in line with the rest of the EA. As a result, while the official headline figure paints a grim picture of the EA growth in Q1, the underlying economy appears to have remained expansionary, albeit modestly. Once adjusting for Ireland’s multinational-driven distortion, EA quarterly growth is estimated to have been closer to 0.2%.

That said, momentum has clearly weakened in Q2, although a provisional agreement between Iran and the US provides some relief in H2. Incoming April and May data point to a broad-based deceleration across the bloc in Q2. Business activity deteriorated, with the S&P Purchasing Managers’ Index falling to 47.5 in May, signaling a contraction in output driven almost exclusively by services. Consumer confidence improved marginally month-on-month but remained firmly in pessimistic territory, with our standardized consumer confidence index staying close to two-year lows, underscoring persistent concerns among European households over household finances and the broader outlook. Other components of activity also entered Q2 on a weak footing. Industrial production softened relative to late-2025 levels, net exports continued to weigh on growth, and private investment made only a marginal contribution to output in Q1. Taken together, the data point to a steady cooling in economic activity, broadly in line with the weakness already embedded in our May projections. For now, we leave our 2026 and 2027 growth forecasts unchanged, with output expected to expand by around 1%, below the 1.3% pace anticipated before the war. Even so, the provisional Iran-US agreement leaves the door open to some upward revisions to the H2 2026 growth outlook, provided the deal proves durable. Any improvement would likely be transmitted first through stronger confidence channels as reduced geopolitical risk and lower energy prices help restore business and consumer sentiment.

Inflation reached 3.2% in May, as higher energy prices continued to feed into headline price pressures. EA annual inflation reached 3.2% in May, increasing from 3.0% a month ago, with energy driving the bulk of this increase (+10.8% y/y). Underlying inflation also strengthened, with core inflation rising to 2.5% while non-energy industrial goods inflation edged up to 0.9%, suggesting that higher input costs continue to pass through to final goods prices. Non-energy industrial goods inflation increased moderately, from 0.8% to 0.9%, but the most concerning development was in services. Services inflation climbed to 3.5% in May from 3,0% a month ago, the highest acceleration in a year and sharpest among the main core components. For the moment, the increase is more associated with costlier transportation costs in some fuel-sensitive services rather than a broad-based surge across the entire services basket. Nonetheless, the rise warrants close attention. Services account for a large share of the inflation basket and tend to be more persistent than energy and goods prices, meaning that a sustained acceleration would make the disinflation path materially more difficult. Looking ahead, headline inflation will remain elevated through 2026 as energy prices stay well above pre-war levels. But then again, if the latest US-Iran deal is sustained, a faster-than-expected normalization in energy markets naturally increases the likelihood that headline inflation averages below 3.0% in 2026. Incoming data over the next few weeks will be critical in determining whether we revise our inflation forecasts downwards, currently at 3.0% and 2.5% for 2026 and 2027, respectively.

The ECB raised its interest rates by 25 basis points, reaffirming a strictly data-dependent and meeting-by-meeting approach amid heightened geopolitical uncertainty. The decision on the June 11^th was unanimous, and according to President Lagarde, robust across the ECB’s updated scenarios. The rationale was clear, as higher energy prices that have lifted the inflation outlook, and a fast-accelerating services inflation have lifted the ECB’s concerns that price pressures are both elevated and spreading beyond the initial shock. We still think that June’s hike should not be considered as the start of a lasting hawkish pivot. Lagarde stressed that inflation is beginning to broaden through both direct and indirect effects, but not yet through second-round wage growth dynamics. This distinction matters. On the one hand, the Bank is prepared to hike further if energy costs feed more persistently into prices, wages or expectations. On the other hand, with the growth outlook having weakened further, the ECB recognizes the need to preserve flexibility if the damage to activity intensifies. This makes, in our view, a data-dependent and strictly meeting-by-meeting approach more appropriate. The recent US-Iran deal reinforces this interpretation, as a durable de-escalation would reduce the risk that the energy shock becomes more persistent. However, it does not move the case for further tightening. Detailed inflation data for May suggest that price pressures have moved beyond energy-linked components and into a sizeable part of the goods, and more crucially, services basket. Since services inflation tends to be more persistent, this keeps a second hike in 2026 firmly on the table, most likely in September, when more inflation, wage and activity data will be available. As a result, we raise our monetary policy forecast for 2026 and now expect the ECB to increase rates once more before gradually reversing these hikes in 2027.

Hoarding is coming back to the EA labor market’s rescue. We have long argued in this publication that the EA labor market remains resilient, and the headline data continue to support this view. Despite latest revisions, the unemployment rate remains close to record lows, while employment expanded further in Q1 2026 (+0.07% q/q). Beneath the surface, however, there are signs that this resilience is beginning to fray. Our recently published consumer confidence indicator for the EA showed for instance that unemployment expectations have deteriorated to their weakest level since 2021. Similarly, from the business side, labor demand, as captured through job vacancies, also continues to deteriorate fast and steadily. Still, these ongoing cracks do not justify a material change in our labor market outlook baseline. Most importantly, labor market hoarding indicators up to May have risen again to two-year highs, suggesting firms remain reluctant to reduce headcount, despite the recent growth slowdown. This should be enough to keep the labor market broadly resilient in the coming months, even as hiring intentions cool.