European Views: Testing Times

Goldman Sachs forecasts a significant slowdown in Euro area growth for 2026 driven by energy prices, yet expects the ECB to raise rates in June and September to combat rising inflation.

Key Takeaways

• 1.Euro area growth is projected to cool significantly in 2026 due to persistently high energy prices.
• 2.A technical recession is likely avoided due to resilience in German fiscal policy and rapid defense spending.
• 3.Inflation forecasts have been upgraded, with headline inflation expected to reach 3.4% and core to peak at 2.7% in Q2.

Table of Contents

• European Views: Testing Times
• Growth Slowdown Ahead
• The German Defence Rollout Remains a Source of Resilience
• A Limited Fiscal Response to the Energy Shock
• Additional Fuel for the Inflation Fire
• The Labour Market is Notably More Subdued than in 2022
• Recent ECB Commentary Points to a Hike in June
• Risks Around Our Two-Hike Baseline Run into Both Directions
• The Case for Short-Lived Hikes
• Disclosure Appendix

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