European Economics Mid Year Outlook

Europe's economy faces stalling growth and higher inflation due to an energy price shock, prompting the ECB to raise rates to 2.5% in 2026. A gradual recovery and subsequent rate cuts are expected in 2027 as energy headwinds fade.

Key Takeaways

• 1.Europe is facing a new energy price shock that will stall growth in 2Q26 and push headline inflation to a peak of 3.6%Y by October 2026.
• 2.The ECB is expected to deliver two insurance rate hikes in June and September 2026, reaching 2.5%, before cutting back to 2.0% in 2027.
• 3.The European consumer is under significant pressure as the energy shock reduces real income and consumption adjusts only gradually.

Table of Contents

• Growth: High Energy, Low Speed
• A meaningful terms of trade shock
• Consumption
• Trade
• Investment
• Labour Market: Less Tight
• Wages: Growth Down and then Up
• Inflation: Up Up and Away
• Monetary Policy: Keeping a Cool Head
• Fiscal Policy: Time to Pay the Energy Bill
• Risk Scenarios: Demand and Supply Shocks
• Elections: A Packed Agenda
• Country Profiles

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