ECB forecasters slash eurozone 2026 growth outlook

The European Central Bank's Survey of Professional Forecasters for the third quarter of 2026, released Friday, showed headline inflation expectations holding steady at 2.7% for 2026 before declining to 2.2% in 2027 and reaching the ECB's 2.0% target by 2028. At the same time, professional forecasters slashed their 2026 growth forecast to 0.6% from 1.0% in the previous round — a sharp downward revision of 0.4 percentage points driven largely by a weak first-quarter GDP outcome and deteriorating sentiment.ecb.europa+1

Inflation Pressures Expected to Fade

The survey found that indirect and second-round effects from the Middle East energy shock are expected to remain limited and concentrated in 2026. Forecasters estimated indirect effects on headline inflation of around 0.2 percentage points in 2026, with second-round effects amounting to less than 0.1 percentage points in both 2026 and 2027. The recent decline in oil and gas prices following the de-escalation of the conflict in mid-June and the reopening of the Strait of Hormuz helped dampen pass-through expectations.ecb.europa

Longer-term inflation expectations remained anchored at 2.0%, with roughly 65% of respondents reporting expectations of exactly 2.0% — up from 55% in the previous round. Core inflation expectations, however, were revised upwards for 2026 to 2.4%, reflecting higher-than-expected recent data outturns.ecb.europa

Growth Outlook Darkens

The 0.4 percentage point cut to the 2026 growth forecast was attributed primarily to eurozone GDP contracting by 0.2% quarter on quarter in the first quarter of 2026, well below expectations. Multiple respondents noted this was largely driven by a sharp contraction in Ireland; excluding Ireland, growth came in at 0.3%. A subsequent upward revision to Ireland's data means some of the downward revision may mechanically unwind in the next survey round.ecb.europa

Beyond the statistical effects, respondents pointed to deteriorating sentiment — particularly in Germany — and continued uncertainty over energy prices as weighing on the outlook for 2026 and 2027. Still, forecasters generally described the euro area economy as fairly resilient when excluding the Irish distortion.ecb.europa

Firms Struggle to Pass On Costs

Separately, the ECB's Survey on the Access to Finance of Enterprises, released earlier this week, showed that more than 5,000 eurozone firms now expect selling prices to increase by 3.2% over the next year, down from 3.5% three months earlier. Wage growth expectations eased to 2.5% from 2.8%, while non-labour input costs were projected to rise by 5.2%, down from 5.8%. Reuters reported the findings added to evidence that the energy-driven inflation surge has yet to generate second-round price impacts.wtvbam+1

The ECB holds its rate-setting meeting on Thursday, with markets widely expecting the policy rate to remain unchanged at 2.25% following June's 25-basis-point hike.bbh+1