Euro-Zone Growth Stalls at 1%, Spain an Exception

Capital Economics forecasts that the euro-zone economy will expand at roughly its trend rate of 1% over the coming one to two years. This modest growth is expected across major member states, with Germany, France, and Italy growing at a pace similar to their trend rates.

However, Spain is seen as an exception, continuing to outperform due to sustained rapid immigration, according to Capital Economics. The firm expects price growth to be more pronounced, with headline inflation reaching about 4% around the turn of the year.

Despite this increase in prices, core inflation is projected to edge higher over the next few quarters as energy costs feed through indirectly. However, second-round effects on wages are expected to be trivial, leading to a sharp decline in headline inflation next year and reaching levels consistent with the 2% target by the end of 2027.

Regarding monetary policy, Capital Economics does not anticipate substantial further tightening from the European Central Bank. In fact, they expect rate cuts to return to the agenda in the second half of next year, which would likely result in bond yields declining in 2027 and spreads staying low in most countries.