The Conference Board Economic Forecast for the Euro Area Economy

Economic activity picks up in Q3, but country-level data surprises. Output in the Euro Area (EA) increased in line with our expectations, up 0.2% quarter-on-quarter (q/q) according to Eurostat’s Q3 flash estimates. Across countries, France defied expectations as, despite recent political turmoil, the economy expanded by 0.5% q/q, with growth driven mainly by stronger foreign demand while private investment and household spending were also supportive. Spain retained its resilience (+0.6% q/q) with broadly based gains, while Italy and Germany stalled. Though expenditure-level details remain scarce, export dynamics have had an uneven impact, supporting robustly growth in France but weighing on Germany and Italy. For the latter two, the steep decline in vehicle exports to the US in recent months amplified the drag, given their high exposure to the automotive sector. At the aggregate level, while higher U.S. tariffs have begun to drag on EU/EA exports to the US, stronger exports to other markets (whether within Europe or elsewhere) have partly offset the decline.

We project growth to pick up further towards year-end. Timely indicators suggest further improvement in overall economic conditions in the EA. The S&P Global Purchasing Managers’ Index (PMI) rose to 52.3 in October, its highest since May 2023, driven largely by renewed momentum in services activity. Similar gains are also evident in the European Commission’s (EC) Economic Sentiment Indicator (ESI) which, though still below its long-term average of 100, improved to 96.8, its highest reading in well over two years. In line with business sentiment, consumer confidence continued its uptrend in October, with the EC’s Consumer Confidence Indicator (CCI) reaching a 10-month high of -14.2 as households grew less pessimistic about the year ahead. All things considered, the Euro Area economy enters Q4 on a firmer footing, with business and consumer confidence improving and some downside risks to the outlook temporarily subsiding (e.g., US-China trade agreement). Combine that with heightened hopes that funds from Germany’s massive €500B fiscal boost will begin to pour into the economy, and quarterly EA growth would reach 0.3% in Q4. Looking further ahead, we leave our EA forecasts unchanged from last month, still expecting a gradual increase in GDP growth in 2026 and 2027 by 1.2% and 1.3%, respectively. This should be driven by stronger private consumption—further supported by declining price pressures and a resilient labor market— alongside more favorable financing conditions and increased government spending on infrastructure and defense which should further bolster domestic demand.

October inflation moves closer to the ECB’s target. Annual headline inflation in the EA declined to 2.1% in October, down from 2.2% a month ago. The decline was primarily driven by lower-than-expected energy costs, while annual food inflation also moderated, with prices slowing from 3.0% to 2.5%. Core inflation—which excludes the more volatile components of energy and food—remained unchanged at 2.4%. Within core components, services inflation inched up by 0.2 percentage points (pp) to 3.4%, but this was offset by softer goods prices pressures. October’s data suggest little reason to revise our inflation outlook. We continue to expect headline inflation declining from 2.1% in 2025 to 1.8% in 2026, with core inflation easing from 2.5% to 1.9% over the same period.

Easing price pressures keep the ECB on hold. As widely expected, the ECB left its three key policy rates unchanged at its October 30^th meeting, with the main policy rate holding at 2% for a third consecutive meeting. A month ago, we highlighted several reasons why another pause was likely. Inflation continues to move closer to the ECB’s 2% target, the bloc’s labor market remains resilient, and overall economic activity is broadly in line with expectations, if not better. At the same time, the recently announced trade deal between China and the US—which eases some export controls on rare earths and critical minerals key to Europe’s manufacturing output—has helped the bank to even view geopolitical risks to the outlook as more balanced than from a month ago. Looking ahead, we expect these conditions to persist until the end of the year. As a result, our call remains unchanged: policy rates will stay at 2% for the remainder of the year. In fact, assuming our baseline scenario of stronger growth in 2026 materializes and other two-sided risks to inflation remain contained, we see the 2% rate holding well into next year.

The EA labor market remains resilient, but emerging country-level cracks have started to appear. The EA jobless rate is still near the historic lows (6.3% in October), underscoring why labor continues to be a key pocket of strength for the EA economy. Strong job gains in recent years and a modest month-on-month improvement in employment expectations reinforce this picture. Yet the aggregate masks divergent trends at the country level. In Germany, the jobless rate rose to 3.9% in October—0.5pp above its 2024 average and a full percentage point higher than the record-lows in H1 2023—signaling some weakness. The French labor market has also cooled, with unemployment at 7.6% versus the 7.4% seen in 2024. Italy and Spain, by contrast, are moving in opposite directions with October readings at 6.1% and 10.5%, both below their 2024 levels of 6.6% and 11.4%, respectively. These developments, especially the gradual softening in Germany and France—must not be overlooked. With risks to the growth outlook still tilting to the downside, we must not underestimate that these small fractures we see in the regional labor markets could widen in the near term, eroding further the resilience we’ve been underscoring in the EA labor market.

We highlight one downside and two upside risks to the EA/EU’s growth outlook:

• US tariffs cast a shadow on EU exports. Exports data up to August are already revealing the adverse impact of US tariffs on EU shipments. With a flat 15% tariff applying now to most EU products, monthly goods exports to the US dropped by more than 25% in August, hitting their lowest level since May 2020.  Shipments have fallen by roughly 10% on average per month since April, compared with average monthly growth of 1.2% during 2014-2019. While some decline was anticipated—particularly in Q2, following US stockpiling ahead of the tariff implementation in early April—the drop is now proving persistent and even accelerating in Q3. Given that EU exports to the US amount to about 3% of the region’s GDP in 2024 nominal terms—and as high as close to 4% for Germany—a continued decline at the current pace and depth would continue to exert pressure on near-term growth.
• Europe breathes a sigh of relief as US-China declare a trade truce: On October 31, President Trump and Chinese President Jinping, agreed to ease trade tensions between the world’s two largest economies. Among other details of the truce, the US agreed to lower its tariff rate on Chinese exports from 57% to 47%, while China pledged to suspend export controls on critical raw materials and rare earths, a decision also benefiting the EU.  The two have agreed to last one year and revisit it after that.
• Netherlands elections tilt pro-European, reducing cohesion risks. With almost all votes counted, the centrist Democrats 66 (D66) party won the most votes in the 29 October general elections. With no political party receiving more than 20% of the electorate vote, D66’s leader  Rob Jetten will lead coalition talks in order to form a majority government. Latest results mark a significant shift from 2023, when Wilders’ far-right Freedom Party had topped the poll. Most importantly, a D66-led centrist coalition is largely expected to pursue a more cooperative stance in Brussels, supportive of EU-policymaking on critical issues like climate and the war in Ukraine. Coalition talks are not expected to be easy, but they will probably not include the Freedom Party.