In the euro area, the economy continues to expand at moderate rates. Fiscal stimulus measures in Germany can be expected to lead to higher economic growth in Germany and moderate spillover effects to other countries in the euro area. However, the subdued global economic expansion, higher US tariffs, and the appreciation of the euro weigh on exports. We expect GDP growth to slightly decrease from 1.5 percent in 2025 to 1.4 percent and then increase to 1.7 percent in 2027.

In the fourth quarter of 2025, the economy expanded by 0.3 percent, the same rate as in the third quarter. Retail sales improved and better consumer sentiment likely aided private spending. Several indicators such as the purchasing manager indices point to a continued moderate expansion. The German economy expanded by 0.2 percent in the fourth quarter and will increasingly contribute to economic growth in the euro area in 2026. However, U.S. tariffs will dampen export growth.

Unemployment rates vary across countries. In Spain, the unemployment rate remains at around ten percent despite a decline. In Germany, it has increased slightly but remains low by historical standards during periods of economic stress. In the euro area as a whole, the rate is slightly over six percent, lower than in previous years.

Inflation in the euro area has normalized, with a rate of 1.7 percent in January. We expect the ECB to keep its interest rates constant in March, but expect one interest rate cut in the second quarter.

Monetary policy is likely to be roughly neutral. Fiscal stimulus from Germany will give the euro area economy some momentum. In general, although higher defence spending will stimulate the economy, fiscal policy will remain broadly neutral. The sustainability of public debt in some countries, particularly France, is a cause for concern.

Overall, we expect gross domestic product growth rates for the euro area of 1.5 percent in 2025, and 1.4 and 1.7 percent in 2026 and 2027, respectively. Inflation will remain slightly below 2 percent.