The Conference Board Economic Forecast for the Euro Area Economy

 Following a modest Q2 expansion (0.1% q/q), the Euro Area (EA) economy looks set to accelerate in H2. The S&P Global Purchasing Managers’ Index (PMI) rose to 51.2 in September, its highest since May 2024, signaling renewed momentum in the economy. Though manufacturing activity slipped back below 50, partly unwinding its H1 gains driven by a surge in US-led exports, services activity strengthened from 50.4 to a stronger 51.3. Country level details confirm the broader picture has not changed from a month ago. Economic activity gained further traction in Spain and Italy, France fell deeper into contraction amid heightened political uncertainty over budget talks, and Germany surprised to the upside, with the composite PMI index rising to 52.0—a 17-month high. Other high-frequency data also point to firmer activity over the near-term. The ECB’s quarterly lending survey showed continued improvements in loan demand among large enterprises and SMEs for Q3, and consumer confidence improved on a month-over-month basis, edging closer to the more optimistic levels seen before April. As a result, we are maintaining our GDP forecasts broadly in line with September projections, still anticipating only incremental growth from 2024 onwards, at 1.0% and 1.2% in 2025 and 2026 respectively.

Entering 2027, growth should accelerate but only if certain conditions are met. Following a moderate recovery in 2025 and 2026, we expect EA activity to gain slightly more momentum, with GDP growth reaching 1.3% y/y in 2027. On the upside, activity should be supported by continued defense-spending and infrastructure modernization, alongside easing inflation and still-positive real wage growth which should in principle lift private spending. Private investment should also remain broadly supportive, helped by more favorable interest rates, though its impact could be tempered by ongoing geopolitical uncertainty. Last but not least, although NGEU funding formally ends in 2026, “residual” pipeline projects and spillovers should continue to bolster activity in early 2027, especially in Spain and even more so in Italy, albeit to a lesser extent than in previous years. On the downside, weaker foreign demand amid higher tariffs on EU exports and intensifying global competition, alongside lingering geopolitical instability and growing doubts about the EU’s ability to deliver on Draghi’s competitiveness recommendations, are viewed as key reasons for limiting the pace of expansion. Overall, our baseline scenario for 2027 points to a slow but steady recovery, with headline risks still tilted to the downside.

Inflation increases to a five-month high in September. Annual headline inflation in the EA ticked up to 2.2% in September, a modest 0.1 percentage points (pp) increase from a month ago. The increase was primarily driven by energy costs, which fell in September less steeply than from a month ago. Annual food prices eased to 3.1% from 3.2% year-on-year, while core inflation — which excludes the more volatile components of energy and food — increased slightly to 2.35% from 2.2% in August. Among EA’s leading economies, Germany’s inflation climbed to 2.4% year-on-year (y/y), in Italy and Spain it rose to 2.9% and 1.8% respectively, and France remained the outlier at 1.1% headline. Looking ahead, September’s readings suggest little change in the short-term outlook for inflation. We still see headline inflation declining from 2.1% in 2025 to 1.7% in 2026, with core inflation easing from 2.5% to 1.9% over the same period.

The room for more cuts in 2025 narrows down. In its September 11 meeting, the ECB held rates unchanged at 2% for the second time, noting inflation around 2% and an essentially unchanged outlook. In the press conference that followed the decision, President Lagarde highlighted that both the economy and inflation are “in a good place” with the medium-term outlook “on target” too. Taking stock of the ECB’s assessment, and with recent data pointing at a modest pickup in private-sector activity, we expect the ECB to leave all three policy rates on hold in the upcoming October 30 meeting. With risks on activity largely viewed as more balanced, amongst other things also due to the EU’s decision to not retaliate against higher US tariffs, an improving growth tone and inflation kept near target,  there is limited scope for monetary policy changes. However, we do underline that Q3 GDP growth flash estimates remain a swing factor. Assuming flash readings point to activity increasing without renewed price pressure, the governing council will have even less incentive to move. As a result, we foresee rates unchanged at 2% through year-end.       

Unemployment rate rises, but this should pose no risks for the EA’s labor market resilience. The unemployment rate in August edged up to 6.3%, from 6.2% a month ago, with data showing a small increase of 11,000 unemployed people. Germany and Italy accounted for most of the rise, while France and Spain recorded declines in joblessness. Despite this uptick, the unemployment rate remains near historic lows, underscoring the continued resilience of the euro area labor market. Looking ahead, we expect employment conditions to remain robust, albeit with signs of gradual softening as job vacancies decline and hiring intentions remain muted. However, productivity growth—measured as real output per total hours worked—was flat in Q2. With output per hour stagnating and wage growth still elevated, labor market frictions may begin to surface sooner rather than later.

We outline two risks to the bloc:

• Lecornu’s last-minute pitch for a budget push. At the time of writing caretaker PM Sebastien Lecornu was still trying to push a 2026 budget through a fractured assembly without activating article 49.3. While it is expected that a new government will be formed, albeit with a new PM, parliamentary elections appear to have been avoided. Most parties, outside the far-right (National Rally) and the far-left (LFI), now acknowledge the political dead-end the French economy has reached and are more open to talks. The sticking point remains the pension reform—introduced in 2023 by Macron, raising retirement age from 62 to 64—with momentum to suspend it growing as a bargaining chip, though this is very unlikely under Macron’s presidency. The political compromise that Macron is expected to achieve in order not to have to go to elections will come at the cost of fiscal finances. It’ starting position was not great to begin with, as the country ran a 5.8% of GDP deficit in 2024, and Lecornu had announced (unsuccessful) measures to bring it down at around 5% in 2026. Any political compromise to avert elections is expected to have a fiscal cost. The question is what markets will make of it.
• Russia’s pressure on Europe’s eastern flank intensifies. In September 2025, roughly 20 Russian drones violated the polish airspace, prompting NATO’s launch Operation Eastern Sentry to reinforce Europe’s eastern borders. Poland was not the only case. In mid-September Romania  reported Russian drones breaching its national airspace,  and three Russian MIG-31s briefly entering Estonian airspace. The sabotage of critical infrastructure, cyberattacks, and electoral interference in Belgium and Germany have also been part of a broader strategy of provocation. Described by Von der Leyen as a “deliberate and targeted gray-zone campaign” against Europe, Septembers’ incidents have triggered a sense of alarm testing the continent’s defense readiness and cohesion. A serious escalation would push the continent closer to direct confrontation.