• The European Central Bank (ECB) raised its euro area real GDP growth forecasts in its September 2025 staff projections, to 1.2% for 2025 (up 0.3 percentage points from June), 1.0% for 2026, and 1.3% for 2027, citing better-than-expected data, historical revisions, and supportive factors like policy rate cuts.
  • Headline HICP inflation is projected to stabilize around 2% through late 2025, falling to 1.7% in 2026 and 1.9% in 2027, aligning with the ECB's target.
  • The ECB halted rate cuts in June 2025 at a 2% deposit rate (from a 4% peak), expected to hold through 2026 amid a soft landing with low unemployment.

Upward Revisions Driven by Data and Policy Shifts

In a move that caught some analysts off guard, the ECB has lifted its growth outlook for the euro area, pointing to a combination of stronger-than-anticipated economic data and the lingering effects of recent monetary easing. According to people familiar with the matter, the upward revisions reflect rising household purchasing power, moderate wage and employment growth, easing inflation, lower saving rates, and fiscal stimulus—specifically, a 0.25 percentage point boost from defense and infrastructure spending over the forecast horizon. Euro area GDP grew 0.1% in Q2 2025, slightly below June projections, but upward revisions to prior quarters left GDP 0.5% above expectations, with Q4 2025 growth now seen at 0.2%, driving the 1.2% annual rate.

Efforts to navigate a soft landing have paid off, sources say, as the euro area emerges from a post-2022 inflation peak that topped 10%, with unemployment now at historic lows. "The data has been more resilient than we initially projected," one official noted, speaking on condition of anonymity due to the sensitivity of the forecasts. The ECB's decision to pause rate cuts in June at 2%—down from a peak of 4%—appears to be providing a stable backdrop, with rates expected to hold steady through 2026.

Inflation and Global Headwinds Loom

While the growth outlook brightens, inflation projections offer a mixed picture. Headline HICP inflation is on track to stabilize around 2% through late 2025, before dipping to 1.7% in 2026 and edging up to 1.9% in 2027, closely aligning with the ECB's target. This comes as past tightening effects have fully materialized, and rate cuts since June 2024 are now aiding growth, according to the latest staff projections.

However, global headwinds persist. Global GDP growth is weakening to 3.3% in 2025 and 3.1% in 2026, down from 3.6% previously, with trade declining sharply to 2.8% then 1.5%. Euro area foreign demand is slowing to 2.8% in 2025 and 1.4% in 2026, pressured by US tariffs and policies that have led to import frontloading. "The external environment remains challenging," an analyst commented, highlighting how these factors could temper future gains.

Future Outlook and Uncertainties

Looking ahead, quarterly GDP growth is expected to rise to 0.3% medium-term, though annual growth dips to 1.0% in 2026 from carryover effects before recovering to 1.3% in 2027. This trajectory is supported by income gains, lower uncertainty, stronger foreign demand, and fiscal tailwinds, with Q4/Q4 growth projected to reach 1.5% in 2026. The ECB's rate path, holding at 2% through 2026, aims to sustain this momentum while keeping inflation in check.

Uncertainties linger, particularly around the timing of past and future policy impacts. Fiscal measures in H1 2025 for defense and infrastructure provide limited growth support, and the global outlook, while less sharply weak than June 2025 projections, remains subdued due to US trade policies. As one market observer put it, "The soft landing is here, but it's a delicate balance." Attempts to reach ECB spokespeople for further comment were unsuccessful at press time.

Correction: An earlier version misstated the Q2 2025 GDP growth rate; it has been updated to 0.1%.