Goldman Sachs(US:GS)2026-01-06 02:23Summary of Euro Area Outlook 2026 Industry Overview - The report focuses on the Euro area economy and its outlook for 2026, highlighting both cyclical improvements and structural challenges. Key Points Economic Growth Forecast - Euro area growth is forecasted at 1.3% for 2026, with a slight increase to 1.4% on a Q4/Q4 basis, up from 1.3% last year, aligning with consensus expectations [3][6][34] Factors Driving Cyclical Improvement 1. German Fiscal Stimulus: - Germany's fiscal expansion is expected to provide a significant boost, with the deficit projected to rise to 3.7% of GDP in 2026, contributing 0.5 percentage points to growth [9][12] 2. Diminished Global Trade Tensions: - The negative impact from global trade tensions is anticipated to lessen, with a previous 0.4% hit to real GDP from tariffs expected to fade [15][19] 3. Robust Consumer Spending: - Real household income growth is projected at 1.5%, with consumption growth also expected at 1.5% in 2026, supported by lower energy prices [19][44] Structural Headwinds - Despite cyclical improvements, significant structural challenges remain: - Increased competition from China's renewed export push is expected to negatively impact European trade, particularly affecting Germany (estimated 0.9% hit to GDP) and Italy (estimated 0.6%) [23][30] - High energy costs, underinvestment in high-tech sectors, regulatory burdens, and demographic shifts are identified as ongoing domestic challenges [27][30] Labour Market and Inflation - Unemployment rates are expected to remain near historic lows, with wage growth projected to slow to 2.9% by the end of 2026, aligning with a medium-term inflation target of 2% [37][41] - Core inflation is expected to dip slightly below 2% by the end of 2026, influenced by a stronger Euro and lower energy prices [44][50] Monetary Policy Outlook - The European Central Bank (ECB) is expected to maintain current rates in 2026, with potential cuts requiring a clear catalyst, such as a significant economic downturn or a pronounced inflation undershoot [48][51] - A return to rate hikes would depend on demand-driven inflationary pressures or significant shocks leading to deviations from inflation targets [55][56] Country-Specific Focus - Germany: Monitoring the quality of public spending and reform agenda is crucial for improving medium-term growth [62] - France: Political and fiscal risks remain, with a projected government deficit reduction from 5.4% to 5.1% of GDP in 2026 [66] - Southern Europe: Continued economic resilience is noted, with structural transformations in Spain, Portugal, and Greece [71] Policy Initiatives - EU policymakers have an opportunity to implement reforms that could enhance economic performance, focusing on reducing vulnerabilities and building a single market [74] Additional Insights - The report emphasizes the importance of monitoring fiscal policies and structural reforms across member states to sustain the cyclical recovery and address long-term challenges [4][61]