The European Union has upgraded its economic growth expectations for the eurozone this year, citing stronger-than-anticipated activity through the first three quarters.
However, the European Commission cautioned that higher tariffs and a challenging global environment could weigh on momentum beyond 2025.
Growth upgraded on resilient activity
In its latest twice-yearly economic outlook, the European Commission projected that gross domestic product across the expanded 21-nation eurozone, will rise by 1.3% this year.
The revision marks a notable upgrade from the Commission’s previous 0.9% forecast and follows a modest 0.4% expansion in 2024.
Officials pointed to resilient private consumption and investment as key drivers behind the region’s stronger performance.
Economic momentum, the Commission said, is expected to continue in the coming quarters, underpinned by a robust labour market and improving purchasing power.
However, growth projections for 2026 were trimmed slightly to 1.2%, down from an earlier estimate of 1.4%.
The Commission noted that global uncertainty and external risks continue to cloud the outlook.
Tariffs and global risks weigh on 2026 forecast
One of the most significant factors behind the downgraded 2026 outlook is the expectation of higher average US tariffs on European goods.
Initial projections assumed a 10% tariff, but a trade agreement reached over the summer cemented a 15% rate on most EU exports to the United States.
The updated forecast now incorporates all sector- and country-specific tariffs remaining in place throughout the projection period.
While acknowledging the pressure these duties pose, European Commissioner Valdis Dombrovskis said the EU still benefits from lower average tariffs relative to other major economies such as China and India.
Beyond trade headwinds, the Commission highlighted several downside risks.
Equity-market volatility—particularly in the US technology sector- could spill into Europe.
Domestic political uncertainty and climate-related disasters were also cited as threats that could impede growth.
Despite these challenges, Dombrovskis emphasized the bloc’s underlying strengths, including favourable financing conditions and a resilient labour market.
“Uncertainty will remain a defining feature of the European economy in the coming years,” he said.
Inflation slows, labour market strengthens
Inflation is projected to continue its downward trajectory, easing to 1.9% in 2026, slightly above earlier expectations but broadly aligned with the EU’s 2% target.
Lower services and food inflation are expected to offset pressure from rising energy prices.
The Commission added that appreciating euro exchange rates and increased import competition should help contain non-energy goods inflation.
Consumer prices are forecast to stabilize at 2% by 2027, suggesting a return to price stability after several years of elevated inflation.
Meanwhile, the unemployment rate is expected to fall steadily, reaching 6.2% in 2026 and 6.1% in 2027, down from 6.3% this year.
This trend reflects the bloc’s shrinking working-age population and strong labour demand.
Germany, the EU’s largest economy, is now projected to grow 0.2% this year, an improvement from earlier expectations of flat growth.
The Commission said rising investor confidence and Germany’s approval of a €1 trillion fiscal spending package for civil and defence investment have supported the outlook.
Looking ahead, EU officials stressed the need to boost domestic demand to sustain competitiveness in an uncertain external environment.
Dombrovskis noted that Germany’s fiscal stimulus and continued deployment of the EU Recovery and Resilience Facility are built into the growth outlook, underscoring the importance of internal economic drivers.
“Given the challenging external environment, we should look at domestic drivers to fuel growth,” he said.
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