Euro area growth to accelerate gradually to 0.4% by mid-2026: Nomura

The growth will be aided by German fiscal support.

“We believe the key drivers of economic activity in 2026 include German infrastructure and euro area defence spending, a gradual recovery in household consumption growth and lower interest rates than persisted from H1 [the first half] 2023 to H1 2025,” Nomura said in a release.

Low inflation, a falling unemployment rate, rising disposable income and a gradual moderation of household savings should support a recovery in household spending, it noted.

However, consumer recovery remains fragile and wage growth is likely to slow in 2026, and therefore, Nomura does not expect a full recovery in household consumption to pre-pandemic growth rates next year.

Downside risks to GDP growth in 2026 include fiscal spending taking longer to materialise and fiscal tightening in some countries, including France and Spain, limiting the impact of German loosening.

Furthermore, while German fiscal spending should boost infrastructure investment, underlying structural issues, such as increased competition from China and a shift to electric vehicles will continue to weigh on the economy.

US tariffs may also hit euro area exports in 2026 by more than we have factored into our forecasts.

Inflation is no longer a concern in the euro area, Nomura feels, and the European Central Bank (ECB) has largely done its job of returning it to target.

There is a strong risk that China will dump cheap goods in Europe due to US tariffs. European Commission and Bank of England analysis suggests this is already occurring in some items, albeit with the risk that it becomes more pronounced and meaningfully weighs on core goods prices, Nomura noted.

Upside inflation risks are more limited. Nomura is sceptical that Germany’s fiscal bazooka will lead to meaningful inflationary pressures due to ample spare capacity in Germany and a high level of underemployment in the manufacturing and infrastructure sectors.

Across all of Europe, Germany stands out as being the only major country that can afford to support the recovery process with grand-scale fiscal loosening. An end to the war in Ukraine would likely contribute to an even speedier economic recovery on account of Germany’s greater reliance on the manufacturing, construction and export sectors, Nomura observed.

“We believe Europe would likely fund an important element of Ukraine’s reconstruction and European firms, notably German firms, would likely reap the benefits of going in to rebuild Ukraine,” it added.

ALCHEMPro News Desk (DS)