Eurosystem staff macroeconomic projections for the euro area, December 2025

The euro area economy is proving to be resilient despite the challenging global environment. Real GDP increased by 0.3% in the third quarter of 2025, which was above the September projections. This followed volatile developments in the first half of the year, reflecting the effects of frontloading in response to higher US trade tariffs and related uncertainty, as well as the impact of sharp fluctuations in Irish data. Domestic demand should remain the main driver of euro area growth, bolstered by rising real wages and employment, in the context of resilient labour markets with record low unemployment rates. Additional government spending on infrastructure and defence announced this year, especially in Germany, alongside improved financing conditions stemming from monetary policy rate cuts since June 2024, is also expected to support the domestic economy. On the external side, while competitiveness challenges persist, including some that are of a structural nature, exports are expected to pick up next year. This improvement is attributed to a rebound in foreign demand amid declining trade policy uncertainty, despite a gradually unfolding impact from higher tariffs. Annual average real GDP growth is projected to be 1.4% in 2025, 1.2% in 2026, 1.4% in 2027 and 1.4% in 2028. Compared with the September 2025 projections, GDP growth has been revised up over the whole projection horizon, reflecting better than expected data, reduced trade policy uncertainty, stronger foreign demand and lower energy commodity prices.^[1]

Inflation is projected to decrease from 2.1% in 2025 to 1.9% in 2026 and then to 1.8% in 2027, before rising to the ECB’s medium-term target of 2% in 2028. The expected decline in headline inflation (as measured by the Harmonised Index of Consumer Prices – HICP) at the start of 2026 reflects a downward base effect stemming from energy prices, while inflation in non-energy components should continue to ease throughout 2026. The contribution of energy inflation to headline inflation is expected to remain muted up to late 2027, before increasing notably in 2028 driven by the expected implementation of the EU Emissions Trading System 2 (ETS2), with an upward impact of 0.2 percentage points on headline inflation. HICP inflation excluding energy is expected to fall from 2.5% in 2025 to 2.2% in 2026 and to 2.0% in 2027 and 2028. Food inflation is projected to drop noticeably as the effects of prior price increases in global food commodities and adverse weather conditions over the summer subside, and is seen to stabilise at rates somewhat above 2% as of late 2026. HICP inflation excluding energy and food (HICPX) is projected to moderate from 2.4% in 2025 to 2.0% in 2028 as services inflation declines amid easing labour cost pressures, and as the past appreciation of the euro feeds through the pricing chain, curbing goods inflation. Wage growth should continue to moderate through 2026, before stabilising at around 3%, underpinned by a resilient labour market and productivity growth just slightly below 1%. Unit labour cost growth is expected to ease, although the impact on inflation is seen to be partly offset by a gradual recovery in profit margins over the projection horizon. Compared with the September 2025 projections, the outlook for headline HICP inflation has been revised up by 0.2 percentage points for 2026, reflecting recent data surprises for HICP inflation and wage growth, with the latter leading to a notable upward revision to the wage outlook. The projection for HICP inflation has been revised down slightly for 2027 as a result of an assumed lower contribution from energy inflation, since the implementation of ETS2 is now expected to be postponed from 2027 to 2028, although this contribution is seen to be partly offset by stronger services inflation.

The global economy has demonstrated resilience this year, despite the headwinds caused by tariffs.^[3] Lower tariffs between the United States and China and reduced trade policy uncertainty, together with lower oil prices and easier financing conditions than foreseen in the September 2025 projections, are providing some relief to the global economy. These factors, combined with positive data surprises in major economies, have contributed to a slightly stronger growth outlook and lower expected inflation for the global economy this year and in 2026.

While the global growth outlook has been revised up slightly compared with the previous projections, it remains subdued relative to the pre-pandemic average. Global real GDP growth is estimated to be 3.5% in 2025 and is expected to gradually decline to 3.3% in 2026 and then to stay at this level in 2027 and 2028 (Table 2).The upward revision to the outlook for global growth largely reflects a stronger growth outlook for the United States and China. In addition to lower tariffs, the slight upward revision to the growth outlook for the United States is due to more resilient domestic demand than previously expected, which is seen to be supported over the near term by positive wealth effects stemming from recent equity price developments and by overall higher fiscal spending assumptions. For China, real GDP growth projections for this year and 2026 have also been revised up slightly to reflect stronger than previously estimated export dynamics and a larger assumed fiscal stimulus.

Headline consumer price index (CPI) inflation across major advanced and emerging market economies is projected to decline gradually, but at a somewhat faster pace than foreseen in the September projections.^[4] It is expected to stand at 3.1% in 2025 and to decrease to 2.8% in 2026 and 2.5% in 2027, followed by a small uptick to 2.6% in 2028. This implies a slightly faster than previously projected decline in CPI inflation this year and next year, owing to lower inflation outcomes across most advanced economies than previously expected. In addition, the downward revision reflects lower bilateral tariffs between the United States and China, as well as a slightly smaller than previously foreseen impact of tariffs on inflation in the United States. Furthermore, in China, weaker domestic demand explains the more gradual than previously expected increase in consumer price inflation over the projection horizon.

Global import growth is projected to remain resilient this year, but its momentum is expected to slow next year. It is projected to be 4.4% in 2025, largely reflecting strong import growth in the first half of this year, before declining to 2.0% in 2026 owing to the adverse impact of tariffs. Global imports are then projected to recover to stand at 3.1% in both 2027 and 2028. The outlook for global imports has been revised up significantly for this year and next year compared with the September projections, while the projections for 2027 remain unchanged. The upward revision to import growth reflects positive data surprises for the second quarter of 2025, mostly across emerging market economies, and, to a lesser extent, lower tariffs agreed between the United States and China in early November 2025. The data surprises can be attributed to two main factors. First, imports exceeded expectations in countries across South-East Asia as well as in non-euro area EU Member States. Concurrent positive surprises in export performance suggest that several of these countries, especially in South-East Asia, might be benefiting from the ongoing reconfiguration of global trade relationships. This shift has been prompted by higher US tariffs and includes the rerouting of Chinese exports to these countries, alongside robust trade in technology products linked to artificial intelligence-related investment. Second, imports in Egypt, India and Türkiye significantly exceeded expectations, although in these cases there does not appear to be a clear link between their stronger imports and diverted Chinese exports.

The outlook for euro area foreign demand has been revised up compared with the previous projections. Growth in euro area foreign demand is expected to stand at 3.8% in 2025, and then to slow to 1.9% in 2026 in line with weaker global trade growth, before recovering to 3.1% in 2027 and 3.0% in 2028. The upward revision for this year, similarly to global imports, reflects data for the second quarter which indicate that the contraction in euro area foreign demand was smaller than previously expected.

Euro area competitors’ export prices are projected to increase at a pace below the historical average and have been revised down compared with the September projections. Euro area competitors’ export prices (in annual terms and measured in national currencies) are expected to increase by 1.1% in 2025, 1.6% in 2026 and 2.0% in both 2027 and 2028. This is below the historical average of 2.6% recorded over 2000-19, as Chinese export price inflation in annual terms is projected to remain in negative territory until the third quarter of 2026. Compared with the previous projections, competitors’ export prices have been revised down over the whole projection horizon, reflecting a lower path of export price inflation across advanced economies, including the United States and several non-euro area EU Member States, and to a lesser extent in China.

Euro area economic activity rose by 0.3% in the third quarter of 2025, which was much stronger than expected in the September projections (0.0%) but more in line with expectations when adjusting for volatility in Irish data (Chart 1). While a sharp unwinding of frontloading that took place in the first quarter of 2025 had been anticipated in Ireland, Irish GDP declined by much less than expected in the third quarter, which explains most of the upward surprise in euro area GDP growth (Chart 1, panel c). An adjusted measure of euro area GDP that uses so-called “modified domestic demand” instead of GDP for Ireland also suggests that growth was 0.3% in the third quarter of 2025.^[7] By this measure, the outturn was only slightly stronger than the respective September projection (0.2%). Across sectors, services activity continued to expand, driven by robust tourism and a pick-up in digital services. By contrast, industrial activity remained subdued in the third quarter, hampered by higher tariffs, still elevated uncertainty and a stronger euro. Meanwhile, the recovery in consumer demand for goods and services continued, supported by improving real incomes amid resilient labour markets.

Real GDP is expected to increase modestly in the fourth quarter, amid continued divergence across sectors. The composite output Purchasing Managers’ Index (PMI) stood at 52.8 in November, indicating positive underlying growth momentum.^[8] The PMI for services business activity increased further, confirming services as the primary driver of growth. By contrast, the manufacturing output PMI declined, remaining just above the threshold indicating no change. The European Commission’s Economic Sentiment Indicator rose further in November, reaching its highest level since April 2023. Overall, survey data suggest moderate growth in the final quarter of the year. However, a projected sharp contraction in GDP growth in Ireland in the fourth quarter of 2025 is seen to subtract around 0.1 percentage points from growth in the euro area, suggesting a slight dip in euro area GDP growth to 0.2% in the fourth quarter (Chart 1, panel c). Some of the headwinds related to tariffs and trade policy uncertainty should start to fade, therefore, euro area growth is expected to pick up in the first quarter of 2026, returning to 0.3%. The projected annual growth rate for 2025 of 1.4% is to a significant extent driven by within-year growth dynamics, although carry-over effects from 2024 are also seen to play a role.

Annual real GDP growth is projected to average 1.3% over the projection horizon, supported by real disposable income growth, receding uncertainty, robust foreign demand, and fiscal stimulus related to defence and infrastructure spending. This fiscal stimulus, mostly accounted for by Germany, should provide a boost to euro area GDP growth in the medium term, which is assessed to cumulatively amount to 0.5% by 2028, with the highest impact on growth expected in 2026-27 (Chart 2).^[9] An estimated slight dip in real GDP growth, from 1.4% in 2025 to 1.2% in 2026, is seen to be the consequence of lower carry-over effects in 2026 following the expected somewhat more modest growth in the second half of 2025. Driven by strengthening carry-over effects, annual real GDP growth is projected to increase thereafter and stabilise at 1.4% in 2027-28, reflecting similar carry-over and within-year contributions in these two years. When using modified domestic demand for Ireland instead of Irish GDP, euro area real GDP growth is seen to rise more gradually, increasing from 1.0% in 2025 to 1.1% in 2026 and to 1.3% in both 2027 and 2028.

The impact of monetary policy rate cuts since June 2024 is expected to gradually outweigh the lagged effects of the previous tightening cycle, thereby supporting growth. The negative impact of the previous monetary policy tightening cycle on economic growth is now seen to have largely dissipated. Based on market expectations regarding the future path of interest rates at the time of the cut-off date for the projections, small positive impacts from the subsequent loosening phase are expected in 2027-28. However, there is considerable uncertainty surrounding the quantitative assessment of these impacts.

Real GDP growth should continue to be driven by domestic demand, with the negative contribution of net exports diminishing to zero in 2027-28. From an expenditure perspective (Chart 3, panel a), private consumption is projected to grow robustly throughout the horizon, providing the largest contribution to real GDP growth. The strengthening of households’ spending is expected to be underpinned by their increasing purchasing power, reflecting robust wage and employment growth amid continued labour market resilience. Additionally, investment growth should outpace GDP growth throughout the horizon. Private investment is expected to compensate for the slowdown in public investment in 2027-28 resulting from the expiry of the Next Generation EU (NGEU) programme funding. Over the projection horizon investment growth should be driven by a reduction in uncertainty, increased defence and infrastructure spending, and strengthening profits and improving demand conditions linked to the cyclical recovery. By contrast, export growth is expected to remain subdued despite improving foreign demand, as persistent euro area competitiveness challenges, US tariffs and the past appreciation of the euro weigh on export performance. This is likely to lead to continued losses in export market shares. As a result, net exports are projected to make negative contributions to real GDP growth in 2025 and 2026, with import growth outpacing export growth. These negative contributions are seen to be partially offset by a positive contribution from changes in inventories in 2025.

Compared with the September 2025 projections, real GDP growth has been revised up by 0.2 percentage points for 2025 and 2026 and by 0.1 percentage points for 2027 (Chart 3, panel b). The upward adjustment for 2025 reflects revisions to past data, including the better than expected outturn for the third quarter of 2025. The somewhat lower trade policy uncertainty, stronger foreign demand and lower energy commodity prices have led to the upward revision to the growth outlook for 2026. Marginally stronger quarterly dynamics and a larger carry-over effect from the stronger growth momentum in 2026 together entail a small upward revision to the outlook for 2027. In terms of expenditure components, the largest upward revisions for 2025-27 relate to investment and, in particular, stronger business investment over the whole horizon and more dynamic government investment in 2027, as well as stronger government consumption in 2025-26. Net trade has also been revised up for 2025, reflecting the better than expected performance of exports in the first three quarters of the year.

Private consumption should expand steadily, supported by increases in labour compensation and non-labour income. Private consumption has continued to grow over recent quarters – albeit at a slower pace than in the second half of 2024, reflecting heightened economic uncertainty. Consumption growth is expected to regain some strength in the coming quarters, with annual rates of around 1.2% projected over 2026-28, which is broadly in line with its historical average (Chart 4, panel a). This outlook is largely due to rising real disposable income, supported mainly by wage income and, to a lesser extent, by non-labour income. Consumer confidence is assumed to recover gradually towards its historical norm over the medium term. This is supported by overall resilient labour market prospects, which should also lead to a small gradual decline in the household saving ratio (Chart 4, panel b). Nevertheless, the saving ratio is likely to remain elevated, reflecting heightened economic uncertainty as well as potential Ricardian effects in countries with announced fiscal stimulus. These effects are supported by evidence from the ECB’s Consumer Expectations Survey. Interest rates remain somewhat above historical average levels and access to credit continues to be tight, which also likely supports an elevated saving ratio. However, it is not clear whether these historical averages are the right benchmarks for the medium term, given that the economy has experienced several large shocks in the post-pandemic period. Additionally, households may need savings to finance higher future housing investment. Despite the more favourable real disposable income dynamics over the projection horizon, real private consumption is broadly unrevised as the stronger income gains are expected to translate into a persistently higher saving ratio.

Housing investment should recover over the projection horizon on the back of favourable financing conditions and rising real incomes. After increasing in the first and second quarters of 2025, housing investment temporarily declined in the third quarter, amid negative outturns in several euro area countries. The decline in housing investment underscores the fragility of the moderate recovery that started at the beginning of the year and reflects still low affordability, high construction costs and persistent macroeconomic uncertainty. Nevertheless, housing investment is projected to strengthen in 2026-28. This recovery reflects improved housing demand – as also evidenced by the continued increase in the number of residential building permits issued and evidence from the Consumer Expectations Survey on households’ perceptions of housing as a good investment – and is attributable to the gradual decline in mortgage rates since the end of 2023. It is also supported by continued growth in real household income and is also evidenced in rising house prices.

Business investment has been more resilient than expected and should gradually gain momentum over the medium term, driven by improving economic activity, receding uncertainty and the impact of fiscal stimuli in some countries. Following positive, albeit slowing, growth rates in the first half of 2025 – driven by frontloading effects in anticipation of higher tariffs – euro area business investment (excluding the volatile Irish intellectual property products) grew robustly in the third quarter, notwithstanding the higher tariffs and still elevated uncertainty. This contrasts with the expectation of a contraction in the September projections. Business investment is projected to continue to rise in 2026-28, amid increasing profit growth, supportive financing conditions, strengthening domestic and foreign demand, declining uncertainty and spillovers from defence and infrastructure spending.

Exports are expected to remain weak in historical terms, despite a short-term pick-up, a positive reassessment owing to a lower effective tariff rate and a more gradual unfolding of the impact of tariffs. Following volatility in the first half of 2025, when exporters frontloaded shipments ahead of the imposition of US tariffs, euro area exports are expected to have grown slightly in the second half of 2025. Some renewed strength in exports in the third quarter of 2025 might have reflected specificities of the pharmaceuticals supply chain, amid uncertainty about the tariff rate for pharmaceuticals before the EU-US trade deal was reached. In addition, export orders for goods and services do not suggest any further significant deterioration in the near term. Export growth is projected to remain weak in historical terms, at 1.9% in 2025 and 1.6% in 2026, but has been revised up by 0.6 percentage points for 2025 and 0.5 percentage points for 2026. These revisions reflect the 1 percentage point reduction in the effective tariff rate applied by the United States to euro area imports (see Box 1) as well as expectations that the fully fledged effects of US tariffs will materialise more gradually, as export volumes and prices have adjusted downwards less than previously expected.

Over the medium term the outlook for exports continues to be clouded by adverse trade policies, competitive pressures – especially from Asian countries – and the past appreciation of the euro. Conditional on unchanged trade policies, export growth is projected to strengthen gradually to stand at 2.6% in 2028, though continuing to fall short of foreign demand. This is due to structural competitiveness challenges, primarily from Asian countries, and to an elevated euro exchange rate which is seen to adversely affect price competitiveness throughout the projection horizon. As a result, compared with the September projection exercise, further losses in export market shares are assumed in addition to those that have already materialised in 2025.

On the import side, growth prospects have improved compared with the September projection exercise. This reflects primarily more robust developments recently, with import volumes now projected to grow by 3.2% in 2025 owing to the appreciation of the euro exchange rate, which has reduced import prices. Imports are expected to expand steadily in the medium term also, supported by low-cost sourcing from China and other Asian economies whose export prices are expected to remain subdued over the medium term. Overall, net trade is expected to make a substantial negative contribution to euro area growth in 2025 (-0.5 percentage points) and 2026 (-0.3 percentage points), but neutral contributions in 2027 and 2028.

The labour market is projected to remain resilient, with the unemployment rate set to decline steadily throughout the horizon. The unemployment rate is expected to decline over the medium term and to reach a historically low level of 5.8% by the end of 2028 (Chart 5), in the context of rather stable projected growth in total employment in 2026-28 and declining labour force growth. Compared with the September projections, the lower unemployment rate from 2025 to 2027 primarily reflects a lower outcome in the third quarter of 2025 than previously expected.

Employment growth is projected to slow in 2026 and to remain broadly unchanged thereafter (Chart 5, panel b). Overall, robust employment growth in 2025 is in line with labour force growth of the same amount in the year. While the growth rate of the labour force is projected to decline thereafter, amid adverse demographics and lower migration inflows, growth in employment is projected to remain above labour force growth, primarily on account of the services sector. Employment growth should, however, remain broadly flat over the projection horizon, but slightly stronger than in the September projections.

Labour productivity growth is expected to be slightly stronger in 2026 and 2027 than previously projected and to continue its cyclical recovery in 2028 (Chart 6). It declined in the third quarter of 2025, having been heavily influenced by volatility in Irish GDP data over the recent period. By contrast, productivity growth in the rest of the euro area picked up in the third quarter of 2025 and is expected to increase slightly over the projection horizon, reflecting an expected recovery from the unusually low growth recorded after the pandemic. Compared with the September projections, labour productivity growth has been revised up somewhat over the projection horizon reflecting the upward revisions to GDP growth.

After tightening slightly in 2025, the euro area fiscal stance is projected to loosen in 2026 and then to tighten again in 2027 and 2028 (Table 4).^[10] The tightening in 2025 was mostly due to discretionary revenue measures, including increases in social security contributions and, to a lesser extent, increases in indirect and direct taxes.^[11] These increases were partly compensated by continued growth in public spending. In 2026 the fiscal stance is projected to loosen, mainly on account of higher public investment. This reflects primarily large defence and infrastructure spending in Germany (over 2026-28) and, to some extent, NGEU-funded investment growth in Spain, among other countries. In 2027 the tightening of the NGEU-adjusted fiscal stance is explained by non-discretionary factors, while in terms of discretionary fiscal policy measures, consolidation in many countries (among other factors, following the expiry of NGEU financing) is seen to be offset by stimulus, mostly in Germany. In addition, NGEU-funded spending that has been deferred to 2027 in some countries is seen to mitigate the tightening of the fiscal stance in that year. In 2028 the euro area fiscal stance is expected to continue tightening. However, the slight tightening of discretionary fiscal policy measures (amounting to just below 0.1 percentage points of GDP) masks cross-country heterogeneity, as a strong loosening of the fiscal stance, particularly in Germany, compensates for a tightening in other countries.

Compared with the September projections, the fiscal stance is seen to be somewhat looser, mainly on account of additional discretionary measures in 2027. The revisions to the fiscal stance over 2025-27 amount to a cumulative loosening of 0.2 percentage points of GDP, primarily driven by higher investment in 2027. At the country level, additional loosening in Germany (mainly related to defence investment over 2026-27) and higher government investment, especially in Italy and to a lesser extent in Spain, are only partly offset by stronger tightening in France (mostly from increases in direct taxes and social security contributions) and other countries.

The budget deficit and debt ratios remain on an upward path (Table 4). After an expected slight decline in 2025, the euro area budget deficit is projected to increase rather sharply in 2026 and 2027, and then to moderate only slightly in 2028 to stand at 3.4% of GDP. This increase reflects rising interest payments (from 1.9% of GDP in 2024 to 2.3% in 2028), which are seen to be only marginally offset by positive macroeconomic effects. The euro area debt-to-GDP ratio is set on an increasing path, as the continuous primary deficits and positive deficit-debt adjustments outweigh the favourable, though diminishing, effects of interest rate-growth differentials. Compared with the September projections, the path of the budget balance has been revised slightly down over 2025-27, mainly on account of the cyclically adjusted primary balance which more than compensates for the slight improvement in the cyclical component. The path of government debt has been revised down, reflecting base effects from statistical revisions to data for 2024 and more favourable interest rate-growth differentials.

Headline inflation is projected to decrease from 2.1% in 2025 to 1.9% in 2026 and 1.8% in 2027, before rising to 2.0% in 2028, mainly owing to energy inflation (Chart 7). Headline inflation is expected to drop from 2.1% in the last quarter of 2025 to 1.9% in the first quarter of 2026, largely owing to energy base effects. The lower average rate for headline inflation for the whole of 2026 reflects a decline in HICPX inflation owing to a moderation in services inflation, alongside weaker food inflation. The further decrease in headline inflation in 2027 mirrors a continued decline in HICPX inflation, which is partly offset by a reversion of energy inflation to zero rates, while food inflation should remain unchanged. The rise in headline inflation to 2.0% in 2028 is mainly attributed to a significant increase in energy inflation, driven by climate transition-related fiscal measures and, in particular, the introduction of the new Emissions Trading System (ETS2), which pushes headline inflation up by 0.2 percentage points (see Box 2). Excluding the impact of ETS2, headline inflation would remain slightly below target (1.9%) in 2028 also, as energy inflation dynamics excluding ETS2 remain very low by historical standards.^[24] HICP inflation excluding energy is expected to decline gradually and to settle at 2.0% in both 2027 and 2028, while HICPX inflation is expected to stabilise at or close to 2.0% in the medium term.

Energy inflation is projected to remain subdued until late 2027, before rising notably in 2028 with the introduction of ETS2 (Chart 9, panel a). The sharp decline in energy inflation during the first quarter of 2026 is largely attributed to a pronounced downward base effect in the transport fuels component. In addition, an expected reduction in electricity prices in Germany, driven by lower network fees, is seen as contributing to the decline in energy prices seen in early 2026. As these effects fade, energy inflation will remain subdued, in line with rather flat energy price assumptions (see Box 1). The noticeable rise in energy inflation to 2.2% in 2028 is seen to be driven mainly by the implementation of the EU Fit for 55 package, particularly the new ETS2 for the heating of buildings and for transport fuels, which is estimated to contribute 1.9 percentage points to energy inflation in 2028 (see Box 2).

Food inflation is projected to continue to decline noticeably in the short term, as commodity prices ease and weather-related factors fade, and to remain at moderate levels throughout 2028 (Chart 9, panel b). Specifically, in 2025 food inflation is expected to fall from 3.2% in the third quarter to 2.5% in the fourth quarter, reflecting the recent easing in certain food commodity prices, such as cocoa and coffee, as well as the fading impact of adverse weather conditions observed over the summer. The continued moderation through late 2026 is attributed to lower euro area food commodity prices and downward base effects from the strong price increases in mid-2025. On average, food inflation is projected to stand at 2.4% in 2026-27, before easing further to 2.2% in 2028. These levels are below the long-term average and in line with benign assumptions for energy and food commodity prices.

HICPX inflation is expected to decline from 2.4% in 2025 to 2.2% in 2026 and then to stabilise at or close to 2% in the later years of the projection horizon (Chart 10), in line with fading labour cost pressures on services inflation. While HICPX inflation is projected to edge up to 2.4% in the final quarter of 2025 and remain there in the first quarter of 2026, it is expected to moderate to 1.9% by the first quarter of 2027. The initial decline in HICPX inflation is seen to be driven primarily by the slowdown in services inflation, mirroring easing labour cost pressures (Chart 11). The disinflation process in the services component is expected to come to a halt in 2027, in line with a stabilisation in labour cost growth. Non-energy industrial goods inflation is expected to remain subdued in the coming months, supported by the appreciation of the euro, before gradually converging towards its historical average of around 1% by late 2027 and remaining there for the rest of the projection horizon, leading to a small uptick in HICPX inflation in 2028.

The ECB’s monetary policy measures since December 2021 are expected to have, on balance, a notable, although declining, dampening impact on inflation over the projection horizon. Given the much longer lags than in the case of growth, the dampening impact of the tightening phase of monetary policy is estimated to still outweigh the subsequent loosening phase over the full projection horizon.

Compared with the September 2025 projections, the outlook for headline HICP inflation remains unchanged for 2025 and has been revised up by 0.2 percentage points for 2026 and down by 0.1 percentage points for 2027 (Chart 12). HICPX inflation is unchanged for 2025 but has been revised up by 0.3 percentage points for 2026 and 0.1 percentage points for 2027. The unchanged headline inflation rate for 2025 reflects largely stable projections for its main components. For 2026, the upward revision to headline inflation is driven primarily by stronger than expected outcomes for energy, services and non-energy industrial goods inflation. Meanwhile, the downward revision for 2027 is largely attributable to the expected postponement of the ETS2 scheme, although this is partially offset by stronger services inflation, in line with upward revisions to labour cost projections.

Nominal wage growth is expected to ease further through 2026 and then move sideways over the remainder of the projection horizon. Growth in compensation per employee increased to just over 4% in the third quarter of 2025, which is above the expectations in the September projections. It is projected to moderate as of the last quarter of 2025, largely owing to a lower contribution from wage drift.^[25] It is expected to average 4.0% in 2025, before slowing to 3.2% in 2026 and 2.9% in 2027 (Chart 13). In 2028 it is projected to tick up to 3.0%, reflecting a slightly higher contribution from wage drift and also higher social security contributions in Germany, while growth in negotiated wages continues to gradually decline. Real wage growth is projected to decline further and gradually converge towards productivity growth in the latter half of the projection horizon. Compared with the September 2025 projections, growth in compensation per employee has been revised up across the entire projection period – by 0.6 percentage points for 2025, 0.5 percentage points for 2026 and 0.2 percentage points for 2027. In part, this is due to the stronger than expected wage growth in the second and third quarters of 2025. However, the revisions also reflect new information on minimum wage increases and a higher expected impact of minimum wages on aggregate wages compared with the September 2025 projections.

Growth in unit labour costs is projected to decline through 2027, driven by lower wage growth and, to some extent, higher productivity, and then to level off at 2.1% in 2028. Unit labour cost growth ticked up slightly in the third quarter of 2025 and is expected to remain over 3% until early 2026. An easing in the growth of compensation per employee is anticipated to lead to a slowdown in unit labour cost growth throughout 2026. On average, unit labour cost growth is expected to moderate from 3.3% in 2025 to 2.6% in 2026 and 2.0% in 2027, before edging up to 2.1% in 2028, slightly above its long-term average. Compared with the September 2025 projections, unit labour cost growth has been revised up for each year of the horizon owing to stronger wage growth, despite slightly higher productivity.

Domestic price pressures, as measured by the growth of the GDP deflator, are expected to decrease in 2026, on the back of lower growth in unit labour costs, and stabilise just above 2.0% (Chart 14). Despite some volatility in the growth rate of the GDP deflator during 2025, owing to fluctuations in the contribution of unit profits, the annual GDP deflator growth rate is projected to decline from an average of 2.4% in 2025 to 2.2% in 2026 and to stabilise at 2.1% in 2027 and 2028, slightly above its long-term average. As growth in unit labour costs moderates, unit profit growth is expected to increase gradually over the projection horizon, supported by the ongoing economic recovery, initially weak import price growth, strengthening productivity growth and a temporary accounting boost – now delayed until 2028 – stemming from the statistical treatment of ETS2.^[26] Compared with the September 2025 projections, GDP deflator growth has been revised up by 0.1 percentage points per year across the projection horizon.

Import price changes should remain slightly negative until early 2026 but return to moderate positive rates thereafter, as the dampening impact of the past appreciation of the euro fades. In annual terms, the growth rate of the import deflator is projected to rise from -0.1% in 2025 to 0.7% in 2026, followed by a stronger increase to 1.7% in 2027 and 1.8% in 2028. In comparison with the September 2025 projections, the downward revision to the profile of import price inflation in 2025 is also due to recent data outcomes and is in line with lower assumptions for energy commodity prices. For 2026, the small upward revision reflects the slightly weaker exchange rate over the projection horizon (see Box 1), while the import price deflator is unrevised for 2027.

6.1 Alternative energy price paths

Alternative paths for energy commodity prices suggest similar risks to inflation on the upside and on the downside. The staff projections are based on the technical assumptions outlined in Box 1. In this sensitivity analysis, alternative downside and upside paths are derived from the 25th and 75th percentiles of the option-implied neutral densities for both oil and gas prices.^[27] According to these densities, risks to oil prices are broadly balanced while for gas prices they indicate some upside risks to the technical assumptions (Chart 15), A constant price sensitivity analysis is also carried out for both oil and gas prices. In each case, a synthetic energy price index (a weighted average of the oil and gas price paths) is computed and the impacts are assessed using ECB and Eurosystem macroeconomic models. The average results across these models are shown in Table 6.

6.2 Alternative exchange rate paths

Market-based distributions for the exchange rate are skewed towards a further appreciation of the euro, indicating some downside risks to growth and inflation. The technical assumptions for exchange rates in the baseline projections are held constant over the projection horizon. Alternative downside and upside paths are derived from the 25th and 75th percentiles of option-implied neutral densities for the USD/EUR exchange rate on 26 November 2025, which was tilted towards a modest appreciation of the euro (Chart 16). The impacts of these alternative paths are assessed using ECB and Eurosystem staff macroeconomic models. Table 7 shows the impacts on output growth and inflation averaged across these models.