In Frankfurt, the European Central Bank (ECB) has dropped bombshell after bombshell by revising downward its economic projections. These downward revisions reflect a less upbeat view of growth and inflation prospects for the region. The new staff projections are a notable upward revision of the Gross Domestic Product (GDP) forecast for 2026 to 1.2% year-over-year. That’s up from the prior 1.0% estimate. The additional 2027 forecast has been moved up. It currently sits at 1.4% YoY, up from the previous forecast of 1.3%.
These revisions are part of a much larger trend of optimism, with growth in the Eurozone expected to be more than double prior estimates. The upward moves indicate that the policymakers might be feeling increasingly confident about the resilience of our economy in the face of mounting challenges. The amendments are made all the more timely with recently released data bolstering positive growth outlooks in various sectors.
Alongside bettering expectations for GDP growth, the ECB adjusted its inflation outlooks for 2026. Headline inflation is now expected to come in at 2.2% year-over-year, an increase from the last estimate of 1.9%. Our measure of core inflation is now at 2.2%, an increase from 1.9% last week. This measure leaves out volatile components such as food and energy. These inflation projections are a good deal higher than what market pricing and consensus expectations imply. This image reflects that policymakers foresee continuing price pressures throughout the economy.
The new staff projections caught most analysts completely off guard. In unveiling a distinctly hawkish tone towards markets, they showed their hand for a notable more aggressive tone going forward on future monetary policy. All of these upward revisions to growth and inflation mark a huge turnaround. Otherwise, the ECB could be forced to tighten measures sooner than it anticipates.
At a recent press conference, ECB President Christine Lagarde preempted questions about speculation on future monetary policy decisions. When asked about the likelihood of an interest rate hike or cut, Lagarde referenced comments made by her colleague Isabel Schnabel in a recent interview. She emphasized that the central bank remains committed to monitoring economic developments closely and will act appropriately based on incoming data.