The economic outlook for the euro area in spring 2025 points to moderate growth amid ongoing global uncertainty. Despite trade tensions and the increase in U.S. tariffs on European goods to 10%, strong performance in the first quarter of 2025 helped to mitigate some of these effects.
This economic activity, partly driven by the frontloading of exports ahead of tariff implementation, is believed to have temporarily boosted GDP. Nevertheless, investment and exports have continued to suffer from these tensions, alongside the impact of a stronger euro exchange rate, which has reduced external competitiveness.
In this context, real GDP is expected to grow by 0.9% in 2025, followed by 1.1% in 2026 and 1.3% in 2027. These projections are supported by domestic demand, which is anticipated to strengthen thanks to newly announced fiscal policies particularly government spending on infrastructure and defense, especially in Germany. Rising real wages, a stronger labor market, and more accommodative financing conditions are also expected to contribute to a gradual economic recovery.
On the inflation front, the rate is forecast to gradually decline to 2.0% by 2027, after reaching 2.0% in 2025 and 1.6% in 2026, largely due to falling energy and food prices. The decline in energy prices is partly attributed to a drop in oil and wholesale natural gas prices, with energy inflation expected to remain negative until 2027, when the new Emissions Trading System (ETS2) is implemented. Wage pressures are also expected to ease, leading to slower growth in unit labor costs and helping to moderate service sector inflation, which has been a major contributor to recent inflation increases.
In the baseline scenario, GDP growth forecasts for 2025 remain unchanged from the March 2025 projections, while the forecast for 2026 has been slightly revised downward due to persistent trade tensions. Meanwhile, inflation forecasts for both 2025 and 2026 have been revised downward by 0.3 percentage points, reflecting lower energy prices and the appreciation of the euro. Projections for 2027 remain unchanged, suggesting a return to a more stable environment by then.
Globally, economic growth is also being negatively affected by rising U.S. tariffs and elevated policy uncertainty. World GDP is expected to grow by 3.1% in 2025, slowing to 2.9% in 2026, before recovering to 3.2% in 2027. A notable slowdown in global trade growth is projected, particularly in 2026, due to the direct effects of tariffs and shifts in global demand patterns.
Overall, the Spring 2025 report reflects a mix of challenges and opportunities for the euro area economy. Despite global trade tensions and uncertainty, fiscal expansion, labor market resilience, and falling inflation are all positive factors that support the possibility of a gradual and sustainable recovery for the European economy in the coming years.