Economists at Societe Generale believe the eurozone is entering the latest energy shock thanks to increased resilience and reduced intensity of oil and gas consumption. They expect euro zone GDP growth to be above potential with stable consumption and German fiscal stimulus, while forecasting increases in European Central Bank (ECB) interest rates in December 2026 and June 2027.

Stable growth with gradual tightening of ECB policy

“Europe is entering the current period of higher energy prices with greater resilience. It has significantly reduced its gas and oil consumption intensity over the last decade. Our NiGEM simulations show that in our baseline scenario, higher energy prices would reduce euro area GDP by only around 0.2-0.3 percentage points.”

“The euro area economy is emerging from a period of weakness and in our base case scenario of the Iran conflict, we expect this recovery to gain momentum thanks to German fiscal stimulus, resilient consumption, AI-led investments and a recovery in the housing market. We expect GDP growth to exceed potential over the forecast horizon.”

“We expect the public deficit in the euro area to increase from 3.1% of GDP in 2024 to around 3.4% in 2025 and 2026, reflecting moderately accommodative fiscal policy. We see the public deficit in Germany increasing from 2.4% of GDP in 2025 to 4.3% in 2026. Several other countries are likely to exercise their fiscal freedom during this period.”

“Given that headline inflation is still expected to remain around 2% in 2027 and that uncertainty is increasing, we do not see an immediate need for the ECB to take policy action. We maintain our call for a 25 basis point increase in December 2026 and a further increase in June 2027.”

“The risk to our call is that these increases will be postponed when the next rounds of forecasts provide a better opportunity to assess the medium-term impact (most likely in June).”

(This article was created with the assist of an artificial intelligence tool and has been reviewed by an editor.)