Eurozone Economy Shows Resilience Despite Energy Shock

The eurozone economy has demonstrated resilience in the face of an energy shock triggered by the war in the Middle East, and moderate growth is likely to continue. In August, headline inflation rose to 3.3% due to renewed increases in energy prices, which are expected to keep inflation above 3% until spring 2027.

The European Central Bank (ECB) is likely to raise rates at least once more, with several Governing Council members suggesting a September increase is probable. The ECB may stop at 2.50%, but a third rate hike in December cannot be ruled out if tensions in the Middle East ease by then.

Despite persistent uncertainty, the eurozone GDP grew by a stronger-than-expected 0.4% in the second quarter. Excluding Ireland's volatile contribution, the eurozone has expanded for four consecutive quarters at a pace of around 0.3% quarter-on-quarter. Germany was among the main growth drivers in the first half of 2026, with higher defence and infrastructure spending supporting growth over the coming year.

However, France recorded no growth at all in the first half of 2026, which does not bode well for budget negotiations. Renewed upward pressure on French bond spreads has become a material risk for the second half of the year.