Europe's economy is lagging behind the US and Asia. Inflation will fall, but there is no growth in sight

The euro zone is entering 2026 with a visible improvement in macroeconomic stability, but without a strong growth impulse – we read in the “PIE Economic Weekly”. PIE economists reminded that, according to IMF forecasts, GDP growth in the euro zone will accelerate and inflation will decline.

“After a period of high inflation and energy shocks, the euro area is entering 2026 with a visible improvement in macroeconomic stability, but also without a strong growth impulse. The narrative dominating the forecasts of international institutions is consistent: the euro area economy will remain resilient, inflation will continue to fall towards the target, and growth will be based primarily on domestic demand. However, all forecasts are subject to high risk due to the unpredictable nature of the US customs policy,” we read. publication of the Polish Economic Institute under the title “PIE Economic Weekly”.

PIE economists pointed out that the euro zone economic growth forecasts for 2026 are gradually improving. According to IMF forecasts, the euro zone's GDP is expected to amount to 1.3%. in 2026 and accelerate to 1.4%. in 2027

“Growth is expected to be driven by relatively strong domestic demand, supported by rising real wages and employment, with resilient labor markets and record low unemployment rates. Additional support for the euro area economy will come from announced public spending on infrastructure and defense, as well as improved financing conditions resulting from interest rate cuts. GDP growth in the euro area will remain differentiated by country, with improvements expected to be particularly visible in the German economy, which is expected to accelerate to 1.1% in 2026. High uncertainty in trade policy and American tariffs, on the other hand, will limit investments in German export-oriented industries,” wrote PIE economists.

Macroeconomic forecasts for the euro zone predict a decline in inflation

They emphasized that macroeconomic forecasts for the euro zone predict a decline in inflation. According to the ECB's projection, HICP inflation is expected to fall from 2.1%. in 2025 to 1.9 percent in 2026 and then it is to decrease to 1.8%. in 2027

In such an environment, the narrative shifts towards maintaining restrictive monetary policy long enough to consolidate inflation's return to the target. In the baseline scenario, the IMF assumes that interest rates in the euro zone will remain unchanged, which contrasts with the projected declines in rates in the US and Great Britain and may be important, among others. for the euro exchange rate and financing conditions in the economy – emphasized PIE economists.

They pointed out that in their forecasts, institutions such as the IMF point to structural barriers faced by euro area countries. The key challenge remains the competitiveness of the economy.

“The IMF also notes that the boom in technology investments (AI) is stronger in North America and Asia than in other regions. In the EU, the growth in computer and electronics production also remains relatively weak, while the USA and parts of Asia have a stronger technological impulse. In practice, this means that in 2026 the euro zone may have a problem joining the global trend of investments in general-purpose technologies, which translates into productivity in the medium term,” wrote the “PIE Economic Weekly”. (PAP)

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