European Central Bank staff expect the euro area economy to grow 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028. Their September projections say the bloc has held up against the Middle East conflict better than they thought it would in June.
Ireland’s volatile data distorts the headline. When the staff adjust for it, using modified domestic demand in place of Irish GDP, growth comes out at 1.2% in 2026 and 2027, then 1.4% in 2028.
Why the forecast went up
Against the June projections, growth for 2026 is revised up by 0.1 percentage points, or 0.3 points with the Irish adjustment. The 2027 figure moves up by 0.2 points, helped by data surprises and positive survey indicators that carry over into next year. The 2028 number is unchanged.
The second quarter of 2026 beat expectations, and short-term indicators point to solid growth ahead. That assumes uncertainty fades, confidence improves and the energy supply shock eases bit by bit. The summer heatwave, the staff say, probably did only limited and temporary harm.
Further out, they expect households to keep spending as real incomes recover on the back of lower energy inflation, with unemployment reaching new historical lows. Government spending on infrastructure and defence should add to growth in later years, especially in Germany, along with investment tied to artificial intelligence. Exports should pick up as foreign demand firms, though competitiveness problems will keep weighing on them. The euro area also stands to gain less than other economies from the global AI boom, because its AI goods sector is smaller.
Inflation: a peak, then a slide
Energy dominates the inflation outlook. Headline inflation, measured by the Harmonised Index of Consumer Prices, is projected to peak at 3.6% in the fourth quarter of 2026. The staff blame the surge in energy prices from the conflict, with crude oil increases amplified by pressure on refined products and on wholesale gas and electricity.
After that, the effect drops out of the year-on-year comparison. Inflation is projected to fall to 2.5% in the second quarter of 2027 and to stay close to 2.0% afterwards. Averaged by year, the projections show 2.1% in 2025, 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028. The 2026 figure is unchanged from June, while 2027 is revised up by 0.2 points and 2028 by 0.1.
Consumer energy prices should follow commodity prices down quickly, turning negative during 2027. They rise again in 2028 when the EU Emissions Trading System 2 begins. Other prices are slower: non-energy inflation is expected to keep rising until early 2027 and stay elevated before easing in 2028.
Heavy uncertainty
The staff stress that all of this rests on the energy shock fading, and they call the outlook highly uncertain given the ongoing conflict, the blockade of the Strait of Hormuz and volatile energy prices. To show the range, they set three alternative scenarios beside the baseline, a milder one, an adverse one and a severe one. In the milder case, energy prices normalise faster and inflation undershoots the 2% target in 2027 and 2028. In the adverse case, prices rise further and stay high, pushing inflation above the baseline through 2028 and growth below it in 2027 and 2028.
