BNP Paribas economists project that Eurozone Gross Domestic Product (GDP) growth will decelerate from 1.5% in 2025 to 1.0% in 2026, before slightly recovering to 1.3% in 2027. This slowdown is attributed to spillovers from the Middle East conflict, which are expected to impact economic activity in the region [1]. Despite these challenges, the Eurozone economy is anticipated to withstand energy shocks, supported by ongoing investments in defence, artificial intelligence (AI), and electrification. These sectors are expected to continue boosting intra-EU trade and provide some resilience to the broader economy [1].
Inflation is forecast to rebound, rising from 2.1% in 2025 to 3.0% in 2026 and further to 3.3% in 2027. In response to this inflationary trend, BNP Paribas expects the European Central Bank (ECB) to implement two 25 basis point interest rate hikes in 2026. The first hike is anticipated in June, which would bring the ECB's deposit facility rate to 2.5% [1].
These projections suggest that while the Eurozone faces headwinds from external shocks and slowing growth, policy tightening by the ECB and targeted investments may help stabilize the region's economic outlook. The anticipated rate hikes and higher inflation could have implications for currency markets, with BNP Paribas noting that these factors support the Euro [1].
CONCLUSION
BNP Paribas forecasts a slowdown in Eurozone growth alongside a rebound in inflation, prompting expectations of ECB rate hikes in 2026. Despite external shocks, investments in key sectors are seen as supportive, and the policy response is expected to bolster the Euro.