The eurozone economy has shown remarkable resilience in 2026, despite facing multiple challenges such as a pandemic, US tariffs, and energy supply shocks. Growth is expected to slow to 0.7% in 2027 from an estimated 1.2% this year, as tighter fiscal and monetary policies, falling employment, and weak external demand take their toll. The German fiscal expansion and resilient consumers have helped offset some of these pressures, but the end of the Recovery & Resilience Fund (RRF) payments and potential fiscal consolidation in France could create a 'fiscal cliff' for some economies.
The external environment remains mixed, with exports to the US picking up but trade with China stagnating due to Europe's struggle to compete with Chinese EV makers. High energy prices and the EV transition continue to pose structural challenges for European industry. Households have weathered the latest energy shock better than in 2022-23, with savings rates still high but consumption growth continuing at around 1% annually.
The labour market has weakened, with employment growth turning negative over the summer. This could impact household confidence and spending. The European Central Bank (ECB) is expected to pivot from rate hikes to cuts as inflationary pressure eases and growth slows. The new ECB president, to be decided at the December EU summit, will face challenging decisions, particularly regarding France's fiscal woes. Polls suggest Marine Le Pen will win the presidency, but the outcome of the Assembly election will be crucial in shaping her response to market and European institutional pressures.
Imminent elections in Spain and Italy will also be important, with Spain likely to see a shift to the right. While a eurozone crisis is not foreseen, the risks from France's debt woes are significant and could lead to bond market volatility and pressure on the ECB to intervene.