In our latest European Economic Outlook, we explore Europe’s changing growth landscape, and the implications of higher inflation and interest rates, as well as rising fiscal pressures for the economic outlook.
Download the report for our full analysis. Or read on for a summary.
Following a resilient performance in the first half of 2026, eurozone economic activity is set to slow, as higher energy prices, rising inflation and growing job insecurity weigh on household spending. Energy prices are likely to remain higher for longer, which could push the European Central Bank to raise interest rates twice more, in December and early 2027, taking the deposit rate to 3%, putting further pressure on growth.
European economic growth has remained resilient despite heightened geopolitical uncertainty and elevated energy prices following the conflict in Iran. Eurozone growth in the first half of the year was supported by robust domestic demand.
In the near-term, momentum is expected to fade as high energy prices weigh on consumption. We expect growth to pick up again in late 2027, supported by strong investment and a recovery in consumption as energy prices ease.
Investment is set to play an increasingly important role in supporting the European economy as consumer spending slows. Investment growth is forecast to rise from 0.9% this year to 1.9% in 2027. Germany's significant public investment in defence and infrastructure is expected to support activity over the medium term and benefit the private sector.
At the same time, AI-related spending on data centres, digital infrastructure, software and IT services is expected to become a key driver of growth, with 49% of eurozone firms planning to increase AI investment over the next year. Crucially, AI investment has so far proved relatively insensitive to higher interest rates. That should help offset weaker non-AI business investment, which is being held back by squeezed profit margins and tighter financial conditions.
Energy costs pushed eurozone inflation to 3.8% in September, and low gas stocks leave prices exposed to a cold winter. We expect inflation to peak this quarter and ease gradually through 2027. Rising food prices could slow that decline, but with wage growth contained, inflation should return to the ECB's 2% target by late 2027 or early 2028, assuming wholesale energy prices gradually decline.
With inflation still rising and the economy proving resilient, we expect the ECB to raise rates twice more, in December and early 2027, taking the deposit rate to 3%. Limited evidence of wider price pressures, together with tighter financial conditions from higher bond yields, suggest the ECB will then stop raising rates before easing towards a more neutral setting in 2028.
Resilience in the face of geopolitical uncertainty and energy price shocks
European economic growth has remained resilient despite heightened geopolitical uncertainty and elevated energy prices following the conflict in Iran. Eurozone growth in the first half of the year was supported by robust domestic demand.
In the near-term, momentum is expected to fade as high energy prices weigh on consumption. We expect growth to pick up again in late 2027, supported by strong investment and a recovery in consumption as energy prices ease.
Investment steps up to drive Europe's growth as consumers pull back
Investment is set to play an increasingly important role in supporting the European economy as consumer spending slows. Investment growth is forecast to rise from 0.9% this year to 1.9% in 2027. Germany's significant public investment in defence and infrastructure is expected to support activity over the medium term and benefit the private sector.
At the same time, AI-related spending on data centres, digital infrastructure, software and IT services is expected to become a key driver of growth, with 49% of eurozone firms planning to increase AI investment over the next year. Crucially, AI investment has so far proved relatively insensitive to higher interest rates. That should help offset weaker non-AI business investment, which is being held back by squeezed profit margins and tighter financial conditions.
Energy keeps inflation elevated as price pressures ease only slowly
Energy costs pushed eurozone inflation to 3.8% in September, and low gas stocks leave prices exposed to a cold winter. We expect inflation to peak this quarter and ease gradually through 2027. Rising food prices could slow that decline, but with wage growth contained, inflation should return to the ECB's 2% target by late 2027 or early 2028, assuming wholesale energy prices gradually decline.
ECB set to tighten further as energy keeps inflation elevated
With inflation still rising and the economy proving resilient, we expect the ECB to raise rates twice more, in December and early 2027, taking the deposit rate to 3%. Limited evidence of wider price pressures, together with tighter financial conditions from higher bond yields, suggest the ECB will then stop raising rates before easing towards a more neutral setting in 2028.
Global Economic and Geopolitical Outlook webcast series
As 2027 approaches, economic and geopolitical developments could reshape growth, investment and risk. Join KPMG economists and geopolitical specialists for a one-hour discussion of the forces shaping the year ahead and the practical considerations for business leader
Broadcast on 3 December 2026
