Euro Area: Economy rebounds in Q2 2026
GDP growth proves surprisingly resilient: According to a preliminary flash estimate, the euro area’s GDP increased 0.4% on a calendar and seasonally adjusted quarter-on-quarter basis in Q2 despite headwinds from the Iran war, and after no growth in Q1. Q2’s reading was the strongest since Q1 2025, and came in above market estimates.In calendar and seasonally adjusted year-on-year terms, GDP expanded 1.0% in Q2, following a 0.5% expansion in the previous quarter.
Spain remains the euro area frontrunner: According to the ECB, digital services remained resilient, partly driven by the growing contribution of AI-related activity. Manufacturing also continued to perform relatively well, supported by defense spending as well as companies building up inventories to hedge against supply chain risks. In addition, a tight labor market also supported economic momentum.
Among the largest euro area economies, Spain’s GDP expanded the most strongly, rising 0.7% (Q1: +0.6% qoq s.a.) and beating market expectations. Meanwhile, the Netherlands’ economy grew by 0.4%, twice the expected rate, while France returned to growth, expanding by 0.2% after contracting by 0.1% in the previous quarter.
Germany and Italy each recorded 0.2% growth, slightly slower than in the previous quarter but still above market expectations.
A detailed breakdown of GDP by expenditure components will be released on 7 September.
GDP growth to ease: Heading into Q3, euro area GDP growth is expected to ease. Following the collapse of the U.S.-Iran ceasefire, inflation spiked at the start of the quarter, and the ECB expects the conflict’s full inflationary impact to manifest gradually in the coming months, potentially weighing on household spending. On a more positive note, fixed investment is expected to gain some steam, supported by AI-related capex and higher defense spending. Key downside risks include a reescalation of the Middle East conflict pushing up energy prices again, alongside steeper-than-expected interest rate hikes.
Panelist insight: Commenting on the outlook, EIU analysts stated:
“Our forecasts point to a modest growth outlook for the rest of 2026. Europe’s real GDP growth forecast has been revised down more than any other region outside of the Middle East, largely owing to its heavy reliance on imported oil and gas and the energy intensity of some major economies, particularly Germany. […] This regional average covers internal divergence: we expect stronger growth in parts of southern and eastern Europe, supported by increased domestic demand, tourism and investment, while larger northern economies remain constrained by high energy costs, weak competitiveness and soft external demand.”