Societe Generale economists project that the Euro area is entering the latest energy shock with improved resilience, having significantly reduced its gas and oil intensity over the past decade [1]. According to their NiGEM simulations, higher energy prices are expected to reduce euro area GDP by only about 0.2–0.3 percentage points in their baseline scenario [1]. The euro area economy is emerging from a period of weakness, and Societe Generale expects the recovery to gain traction, driven by German fiscal stimulus, resilient consumption, AI-driven investment, and a housing recovery. They forecast GDP growth to run above potential over the forecast horizon [1].
Fiscal policy is expected to remain mildly accommodative, with the euro area public deficit projected to rise from 3.1% of GDP in 2024 to approximately 3.4% in 2025 and 2026 [1]. Germany’s public deficit is forecast to increase from 2.4% of GDP in 2025 to 4.3% in 2026, as several countries are likely to utilize their fiscal headroom during this period [1].
On monetary policy, Societe Generale maintains its call for a 25 basis point European Central Bank (ECB) rate hike in December 2026 and another in June 2027, citing that headline inflation is expected to remain around 2% in 2027 and uncertainty is heightened [1]. They see no immediate need for ECB policy action, but note that the risk to their forecast is that these hikes could be brought forward if future forecast rounds provide a better opportunity to assess the medium-term impact, with June being the most likely time for reassessment [1].
CONCLUSION
Societe Generale anticipates a resilient Euro area recovery, supported by fiscal stimulus and reduced energy dependence, with gradual ECB tightening expected in late 2026 and mid-2027. The mildly accommodative fiscal stance and stable inflation outlook suggest moderate market optimism, though future ECB actions could be adjusted based on evolving economic conditions.