Eurosystem staff macroeconomic projections for the euro area

Overview

The economic outlook for the euro area remains highly uncertain in the context of the war in the Middle East, the closure of the Strait of Hormuz and elevated oil price volatility. Some of the risks identified in the March 2026 ECB staff projections have started to materialise, with oil prices increasing further, supply chain pressures emerging, and markets now expecting the impact of the conflict to be more protracted. In the June 2026 Eurosystem staff baseline projections it is assumed that energy prices will decline relatively rapidly in the course of the next few quarters, in line with futures prices.  However, the evolution of the conflict, together with its impact on energy prices, on the prices of some non-energy commodities and on economic activity, as well as the pass-through of the energy price shock to non-energy consumer prices, remain subject to considerable uncertainty. Therefore, in addition to the baseline, alternative scenarios have been prepared which assume varying degrees of intensity of the energy shock and its impact on the euro area economy.

Short-term indicators point to subdued economic growth in the near term, as higher energy prices and greater uncertainty weigh on domestic demand. In particular, as rising energy costs erode real disposable income and dampen consumer sentiment, household consumption growth – which was a key driver of growth in 2025 – is projected to slow considerably this year. Conditional on a relatively rapid resolution of the conflict and a related reduction in uncertainty, this weakness in private consumption growth is expected to be temporary. Over the medium term domestic demand should be bolstered by a recovery in real disposable income, owing to falling energy prices and a resilient labour market, and by rising government spending on infrastructure and defence, especially in Germany, complemented by investment related to artificial intelligence (AI). On the external side, export growth is expected to remain constrained by persistent competitiveness challenges, with euro area exporters experiencing further declines in their global market shares. The baseline projections foresee annual real GDP growth of 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028. Compared with the March 2026 projections, GDP growth has been revised down by 0.1 percentage points for both 2026 and 2027, reflecting the stronger than previously expected impact of the war in the Middle East, while for 2028 it has been revised up by 0.1 percentage points as this impact is seen to unwind.

The baseline projections see headline inflation, as measured by the Harmonised Index of Consumer Prices (HICP), peaking at 3.4% in the third and fourth quarters of 2026 and remaining above 3.0% until early next year, driven by a surge in energy inflation as a result of the conflict in the Middle East. This mostly reflects a strong and immediate pass-through of higher crude oil prices to consumer fuel prices, amplified by additional pressures on prices of refined oil products. As most of the war’s impact on energy prices drops out of the year-on-year comparison, headline inflation is expected to fall sharply to 2.3% in the second quarter of 2027 and to hover around 2.0% thereafter. This profile for headline inflation masks diverging patterns across the main components. Decreases in energy commodity prices, as embedded in futures prices, as well as large base effects, imply that energy inflation would decline, turning negative in 2027, and would then tick up in 2028, owing to the introduction of the EU Emissions Trading System 2 (ETS2). By contrast, the energy shock is expected to feed through gradually to the non-energy components of the HICP, with inflation in these components continuing to increase up to the middle of 2027, partly offsetting the decline in inflation in the energy component, before moderating again in 2028. Food inflation is projected to peak at 3.7% in the second quarter of 2027 and then to ease in 2028. Similarly, HICP inflation excluding energy and food (HICPX) is projected to increase to a peak of 2.7% in early 2027 and then to moderate from the second quarter of the year. Indirect and second-round effects from the current energy shock are expected to be smaller than those seen in 2021-24, tempered by the weaker outlook for aggregate demand (which is expected to limit inflation compensation effects on wages), the past appreciation of the euro, and ongoing import penetration from China. At the same time, it is assumed that supply chain bottlenecks will not significantly amplify overall cost pressures. Overall, the baseline projections foresee HICP inflation picking up from 2.1% in 2025 to 3.0% in 2026, before declining to 2.3% in 2027 and then returning to target, at 2.0% in 2028. Compared with the March 2026 projections, the outlook for HICP inflation has been revised up by 0.4 percentage points for 2026 and 0.3 percentage points for 2027, largely on account of higher energy and food price assumptions, including stronger indirect effects on non-energy inflation. For 2028, it has been revised down by 0.1 percentage points, partly owing to a sharper than previously assumed decline in oil prices. HICPX inflation has been revised up by 0.2, 0.3 and 0.1 percentage points for 2026, 2027 and 2028 respectively, reflecting both higher services and non-energy industrial goods (NEIG) inflation in 2026-27 and higher NEIG inflation in 2028. 

Alternative assumptions regarding the magnitude and persistence of the war in the Middle East and the energy price shock, their impact on the international environment and uncertainty, and propagation of the impact via indirect and second-round effects, would lead to markedly different macroeconomic outcomes. To illustrate this uncertainty, staff have prepared three alternative scenarios – an adverse scenario, a severe scenario and a milder scenario. These scenarios offer illustrative examples of alternative paths for energy commodity prices and their transmission to the euro area economy – they are not forecasts and staff do not assign any probabilities to them.

• The adverse scenario assumes a sharper and more persistent increase in energy prices than in the baseline. It also incorporates higher uncertainty and larger international spillovers, as well as stronger indirect and second-round effects on inflation. Relative to the baseline, it implies higher inflation in 2026-28 (Table 1). Conversely, GDP growth would be lower than in the baseline in 2026 and 2027 and the same as the baseline in 2028.
•  The severe scenario assumes a stronger and more persistent energy price shock, greater uncertainty and a stronger reaction from wages and non-energy prices than in the adverse scenario. Relative to the baseline, it entails significantly and persistently higher headline inflation across the projection horizon, consistent with past experience of non-linearities in the face of a large energy price shock. GDP growth would slow considerably in 2026-27, before rebounding slightly faster in 2028 than foreseen in the baseline, reflecting the rise in income and in demand resulting from stronger responses from wages. 
• Finally, in the milder scenario oil prices would normalise more rapidly than in the baseline, implying a faster moderation in inflation, which would fall below the 2% target in 2027 and 2028, while GDP growth would recover somewhat earlier and more robustly than in the baseline.