In our latest European Economic Outlook, we explore how Europe’s adoption of AI could reshape jobs and productivity, highlight the outlook for long and short-term interest rates as a potential end to quantitative tightening nears, and assess how easing inflation and consumer caution may shape the continent’s wider economic trajectory.
Download the report for our full analysis. Or read on for a summary.
Economic growth across Europe is expected to remain modest, with Eurozone GDP anticipated to grow by 1.1% in 2026 and 1.5% in 2027, supported by domestic demand as Europe seeks to realign its global trade network.
See page 5 of our report for our latest country level forecasts.
More uncertain transatlantic relations have driven the EU to accelerate the pursuit of strategic trade agreements with third countries, in a move to reposition extra-EU trade.
The EU-India trade deal and the EU-Mercosur deal both represent a significant milestone after a period of protracted negotiations.
The EU–India free trade agreement will reduce tariffs on over 95% of product groups, yet India currently accounts for less than 2% of extra EU exports, meaning the deal is unlikely to generate substantial economy‑wide gains for the EU at present.
Ratification of the recently signed Mercosur trade deal now faces delays following the vote in the European Parliament to seek judicial review - although the deal could still be provisionally applied while waiting for the courts’ judgement. The deal could in the long run add 0.1% to EU GDP based on Commission’s estimates. Despite its relatively small economic impact, owing to the modest size of EU exports to the Mercosur area, the deal could hold significant strategic value by helping secure a more reliable supply of essential raw materials for example.
While overall inflation across the eurozone is continuing to ease, dynamics vary among different member states. In a majority of Eurozone economies inflation remains elevated, though in some countries such as France, Italy and Finland inflationary pressures continue to ease.
In the Eurozone, inflation is anticipated to fall below target in 2026, to around 1.7%, as past increases to energy prices drop out from the headline measure. The ECB is likely to have ended its rate lowering cycle, with interest rates unlikely to change in the near term unless the outlook for inflation changes.
European economic growth is reliant on the modest pace of consumption growth as the main driver of growth this year.
Savings remain elevated across most EU economies which is dampening household consumption growth. Despite this, a resilient labour market and strong nominal wage growth are together expected to lift real disposable incomes, sustaining consumption growth despite the drag from high savings.
However, a sharp acceleration in consumption is unlikely. Despite evidence of improvement, consumer confidence remains weak, with sentiment surrounding the general economic conditions and major purchases over the coming year remaining negative across Europe. This points at consumer prudence persisting into 2026, with savings rates kept elevated.
The development of AI technologies is an important potential driver of European productivity and economic growth in the next decade. Generative AI applications are rapidly transitioning from an experimental phase to scale up and organizational transformation. Specific use cases range from summarisation, drafting and image generation.
Since 2015, almost all EU labour markets have seen an increase in the share of tasks suitable for Generative AI automation. This reflects the ongoing shift toward greater share of cognitive based tasks and services in economic activities, which corresponds to the type of tasks that are more amenable to be performed by AI systems.
The immediate transition could be marked by disruption. Workers in highly exposed occupations facing a sudden decline in demand for their skills would clearly benefit from retraining and support to transition to other occupations. This is one area where the public sector has a clear role to play, in enabling a rapid transition to a new mode of working, while minimizing the negative impacts on affected workers.
Strategic trade agreements could drive limited economic payoffs
More uncertain transatlantic relations have driven the EU to accelerate the pursuit of strategic trade agreements with third countries, in a move to reposition extra-EU trade.
The EU-India trade deal and the EU-Mercosur deal both represent a significant milestone after a period of protracted negotiations.
The EU–India free trade agreement will reduce tariffs on over 95% of product groups, yet India currently accounts for less than 2% of extra EU exports, meaning the deal is unlikely to generate substantial economy‑wide gains for the EU at present.
Ratification of the recently signed Mercosur trade deal now faces delays following the vote in the European Parliament to seek judicial review - although the deal could still be provisionally applied while waiting for the courts’ judgement. The deal could in the long run add 0.1% to EU GDP based on Commission’s estimates. Despite its relatively small economic impact, owing to the modest size of EU exports to the Mercosur area, the deal could hold significant strategic value by helping secure a more reliable supply of essential raw materials for example.
Eurozone inflation returned to target, but paths diverge at a national level
While overall inflation across the eurozone is continuing to ease, dynamics vary among different member states. In a majority of Eurozone economies inflation remains elevated, though in some countries such as France, Italy and Finland inflationary pressures continue to ease.
In the Eurozone, inflation is anticipated to fall below target in 2026, to around 1.7%, as past increases to energy prices drop out from the headline measure. The ECB is likely to have ended its rate lowering cycle, with interest rates unlikely to change in the near term unless the outlook for inflation changes.
Savings rates across the Eurozone remain elevated
European economic growth is reliant on the modest pace of consumption growth as the main driver of growth this year.
Savings remain elevated across most EU economies which is dampening household consumption growth. Despite this, a resilient labour market and strong nominal wage growth are together expected to lift real disposable incomes, sustaining consumption growth despite the drag from high savings.
However, a sharp acceleration in consumption is unlikely. Despite evidence of improvement, consumer confidence remains weak, with sentiment surrounding the general economic conditions and major purchases over the coming year remaining negative across Europe. This points at consumer prudence persisting into 2026, with savings rates kept elevated.
The growing role of AI in European labour markets
The development of AI technologies is an important potential driver of European productivity and economic growth in the next decade. Generative AI applications are rapidly transitioning from an experimental phase to scale up and organizational transformation. Specific use cases range from summarisation, drafting and image generation.
Since 2015, almost all EU labour markets have seen an increase in the share of tasks suitable for Generative AI automation. This reflects the ongoing shift toward greater share of cognitive based tasks and services in economic activities, which corresponds to the type of tasks that are more amenable to be performed by AI systems.
The immediate transition could be marked by disruption. Workers in highly exposed occupations facing a sudden decline in demand for their skills would clearly benefit from retraining and support to transition to other occupations. This is one area where the public sector has a clear role to play, in enabling a rapid transition to a new mode of working, while minimizing the negative impacts on affected workers.
