Euro area: Above-potential GDP seen lifting inflation – Nomura

Nomura expects Euro area GDP growth to accelerate in 2026–2027 to around 1.7–1.8% year-on-year, above estimated potential of roughly 1.1–1.2%. They see stronger growth, especially in Germany and Spain, as a key driver of domestic inflation pressures, although spare industrial capacity and underemployment in Germany could temper the upside.

Faster growth versus limited capacity slack

"We forecast euro area GDP growth to accelerate in 2026 and 2027, before settling between 1.7 and 1.8% y-o-y from Q2 to Q4 2027. Our forecasts for euro area GDP growth are similar to the consensus of the ECB in 2026, albeit we meaningfully deviate in 2027. Our annual rates of GDP growth are, on average, 0.3-0.4pp higher per quarter in 2027 than the consensus or the ECB."

"There is a lot of uncertainty on the level of potential output in the euro area. However, if potential growth is indeed 1.1-1.2% y-o-y and our GDP growth forecasts of 1.7-1.8% materialise, this could result in meaningful inflationary pressures."

"We expect more growth than the consensus and the ECB in large part due to Germany, and our expectation that the multipliers from the fiscal bazooka could be higher than the consensus estimates, as well as due to Spain, where we forecast GDP growth of 2.6% this year and 2.7% next year, versus the consensus at 2.2% and 1.9%, respectively."

"That said, a marked level of spare industrial capacity in Germany and an important level of underemployment in the sectors most likely to benefit from the fiscal bazooka could limit the upside inflationary pressures."

"In our view, however, it appears we are moving into a pre-financial crisis world where the labour market is tight, the unemployment rate is below the equilibrium unemployment rate, and GDP growth is above potential (assuming the consensus is correct that potential growth in the euro area at 1.1%)."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)