S&P Global Reveals Europe Economic Outlook for Q1 2026

As we approach the end of the year, I have been thinking about what analysts are saying about the European economy, looking toward 2026.

Overall, analysts expect GDP growth across European countries to continue at a similar pace in 2026 as in 2025. However, the growth distribution will change. One of the big players, Spain, which was a major contributor to the Eurozone growth, is expected to slow down. Germany, however, is expected to pick up after being a major contributor to the Eurozone's slower growth this year.

Germany’s expected growth

To understand Germany's expected growth, it helps to look at the background.

During Angela Merkel's time, Germany introduced the so-called "debt brake" (Schuldenbremse). This was a constitutional rule introduced in 2009 that limited federal borrowing to 0.35% of GDP to enforce fiscal discipline.

Following the 2025 German federal election and during the negotiations for the next cabinet, Friedrich Merz and Olaf Scholz reached an agreement on reforming the debt brake. They exempted defense spending above 1% of GDP and created a special fund of €500 billion for infrastructure.

Why is this important? This is the largest fiscal package since reunification 35 years ago. It is said to come from rising geopolitical tensions, pressure from the U.S. for Germany to meet NATO defense spending targets, and global competition challenging the German economic model.

The plan involves over €1.1 trillion in state spending over 12 years, which is about 25% of Germany's current GDP! The main goal is to allocate money to transport and digital infrastructure (roads, railways, and internet networks), defense, and the green transition (with around €100 billion for lowering energy costs and supporting electric vehicles). There are also tax changes starting gradually from 2028 (such as lower corporate taxes, faster write-offs for business investments, and relief on VAT and electricity taxes), labor incentives (like tax-free overtime, benefits for pensioners who keep working or for part-time workers, and a higher minimum wage), and deregulation (simpler rules for government contracts, faster project approvals, and switching to a lighter EU supply chain law). This stimulus is expected to boost German real GDP by an extra 0.5% in 2026, 0.7% in 2027, and 0.8% in 2028.

Germany's export model has faced difficulties for three years, with high energy costs, competition, and low public investment. Many manufacturing jobs have been lost.

Spillover effects from this big reform could add about 0.2% to Eurozone GDP over three years, with bigger benefits for Central and Eastern European countries!

Rate cuts?

Inflation has moderated in most of the EU, as a result of lower energy commodity prices, currency appreciation and loosening labor markets (ratio of vacancies to unemployment).

The S&P is clear about this, determining that adding up the assumptions for stable growth in 2026 together with inflation edging up again, the scope for monetary policy rate cuts across Europe is limited.

The outlook is more like: the ECB and the SNB (Switzerland) could start rising rates again in 2027 if GDP surpasses the potential. German stimulus and a tight labour market would support this.

Digital Transformation

Digital transformation is set to be one of the biggest growth factors across the EU. Gains have been clear in the European IT sector, with an annual growth of 2% since 2023. There is expectation for more investment in AI infrastructure in 2026, with EU policies supporting digital transformation at small scales.

Takeaways

Many unknowns remain, as this is a forecast. Risks to growth are numerous (tariffs, trade volatility, geopolitical tensions). Potential spillovers effects from slower growth from Europe’s main trading partners (U.S. and China). Rise in unemployment if labor costs reduce profit for companies. Tighter fiscal policy if consolidation intensifies.

Growth could also increase more than expected. German stimulus could have a bigger impact than assumed, easing inflation. Slowing geopolitical tensions could bring consumer confidence up, leading to higher spending.

Inflation could also be lower, if the appreciation of the Euro and the Swiss Franc continues and if the global competition for manufacturing intensifies. But it could be lower, if the economy accelerates more than anticipated.

Very excited to see how this all unfolds!

Source: Economic Research: Economic Outlook Europe Q1 2026: Germany’s Fiscal Reawakening