Autumn 2025 Economic Forecast shows continued growth despite challenging environment

Executive summary

Economic growth exceeded expectations in the first nine months of the year, with real GDP growth outperforming the annual expansion projected in spring. This better-than-expected performance was initially due to a surge in exports ahead of anticipated tariff increases, but investment in equipment and intangible assets also performed more strongly than expected — most notably in Ireland, but also in other countries. Continued growth in the third quarter is testimony to the resilience of the European economy and its ability to navigate unprecedented shocks. 

Data from the Commission surveys and PMIs in October suggest continuing growth momentum in the coming quarters. Key conditions for an expansion in economic activity remain in place, despite a challenging external environment and persistent uncertainty. 

Growth is supported by a resilient labour market, decreasing inflation and favourable financing conditions. In addition, policy support from the Recovery and Resilience Facility and other EU funding is cushioning the effect of tighter fiscal policy in several Member States.

Altogether, this forecast projects real GDP to grow by 1.4% in the EU in 2025 and 2026, edging up to 1.5% in 2027. The euro area is expected to broadly mirror this trend, with real GDP growing by 1.3% in 2025, 1.2% in 2026, and by 1.4% in 2027. At the same time, potential growth is set to go down a notch from 1.5% in 2024 to 1.3% in 2027 in the EU, and from 1.4% to 1.2%, respectively, in the euro area, as growth in the working age population slows. Inflation is forecast to continue its decline in 2025, falling to 2.1% in the euro area, and then hover around 2% over the next two years. In the EU, inflation is set to remain marginally higher, falling to 2.2% in 2027.

The Joint Statement on a US-EU framework on an agreement on reciprocal, fair and balanced trade, issued on 21 August 2025, establishes a headline tariff rate of 15%, but includes some important exemptions and carveouts for sectors such as pharmaceuticals and semi-conductors, while imposing higher tariffs on steel and aluminium. For several other trading partners, the headline tariff rate is similarly set at 15%, but the scope of exemptions and carveouts varies. Moreover, headline US tariffs are higher for some major EU trading partners, including big emerging market economies (e.g. China, India, ASEAN countries). 

Globally, the US tariffs are at their highest levels in nearly a century. The forecast assumes that all country- and sector-specific tariffs implemented or credibly announced by the US administration at the cut-off date will remain in place throughout the forecast horizon. 

Consequently, the global trade-weighted average tariff rates on US imports are estimated to be higher than assumed in the Spring 2025 Forecast, except for certain countries that have secured trade deals with the US, notably China. Compared to other major global players, the EU enjoys lower trade-weighted average tariff rates on exports to the US (see Box I.1.1), providing a relative advantage for the EU economy. However, this advantage is set in the context of modest growth in export markets for goods and a strong euro.

Global economic activity also expanded more vigorously than expected during the first half of the year, largely due to trade frontloading and improved financial conditions. Growth in advanced economies picked up in the second quarter, driven by the US and Japanese economies, while China also recorded stronger-than-expected growth during the first half of 2025, mostly thanks to fiscal stimulus and lower-than-assumed US tariffs. This positive trend is expected to extend to the third quarter of the year, though trade restrictions and lingering trade policy uncertainty continue weigh on economic expansion. Overall, projections for global growth in 2025 and 2026 are slightly higher than in the Spring 2025 Forecast. Excluding the EU, it is expected at 3.4% in both years, and 3.5% in 2027. Global trade (excluding the EU) is set to decelerate this year and next, under the impact of trade restrictions, and strengthen again in 2027. 

Concerns about global demand have weighed on the price of oil. At the cut-off date of this forecast, Brent crude oil futures prices were 3% lower for 2026 than assumed in the Spring 2025 Forecast. They are expected to remain around USD 63 per barrel in 2027. Similarly, European gas spot and futures prices are lower than in spring, with prices assumed to average 32 EUR/MWh in the final quarter of 2025 and declining to 29 EUR/MWh in 2027. By contrast, although wholesale electricity prices are on average expected to decline softly throughout the forecast horizon, they are projected to be around 2% higher in 2026 than was projected in spring.

In the EU, exports of goods and services rose by 1.9% in the first quarter, largely due to frontloading in anticipation of rising US import tariffs. Ireland played a significant role in this growth, along with notable contributions from Germany and Belgium. As the effect of frontloading wanes, export growth in the remainder of the year is set to slow down significantly. Imports in the EU also grew faster than expected in the first quarter of 2025. Looking ahead to 2026, the growth of the EU’s export markets is expected to slow down due to high global tariffs, leading to slower growth in goods exports (see Box I.1.2). A rebound in goods export growth is anticipated in 2027, partly premised on the EU's tariff advantage in the US market compared to other major trading partners. Meanwhile, exports of services are projected to continue growing robustly throughout the forecast period. Goods imports are expected to follow a similar pattern to goods exports but grow at a more dynamic pace. This high import growth is expected to be driven by trade diversion caused by US tariffs on imports from third countries. China’s relatively high share in US goods imports and the high average tariffs it faces in the US mean that a large amount of its exports could be redirected to other markets, including the EU. Available evidence does indeed show a recent decline in Chinese exports to the US, while exports to the EU and other regions have increased. This, however, may also reflect ongoing efforts by Chinese firms to offload excess production in specific sectors. Overall, the contribution of net exports to EU real GDP growth is expected to be negative in 2025 and 2026, before becoming neutral in 2027.

Efforts are underway to revise national Recovery and Resilience Plans (RRPs) to facilitate the deployment of remaining funds by the 31 August 2026 deadline (see Box I.4.1). Options include incentives for private investment through financial instruments (including InvestEU), equity injections into national promotional banks, and the transfer of RRF funds to the future European Defence Industry Programme (EDIP).

Although the RRF is a temporary instrument, its macroeconomic impact is set to last beyond its conclusion. Some RRF-funded expenditure might take place after 2026, especially in the case of financial instruments that provide financing for private sector investment.

In addition, the waning direct fiscal impulse provided by the RRF is expected to be mitigated in 2027 by increased utilisation of other EU funds. The recently concluded mid-term review of cohesion policy provides Member States with greater flexibility and incentives to deploy existing resources more rapidly and accelerate programme implementation. Importantly, the structural reforms and investments carried out by Member States under the RRF are set to improve productivity and raise income levels in the longer term.

Private consumption grew at a slightly slower pace than anticipated during the first half of 2025. After declining since late 2024, consumer confidence stabilised over the summer, although it remains below its long-term average. While real household disposable income continued to rise, the saving rate remained relatively high and even increased in the first quarter, thereby limiting consumption growth. Over the forecast horizon private consumption is expected to support growth with a steady annual rate of 1.5%, helped by a gradual decline in the saving rate, to 14.4% in 2027. Public consumption growth is expected to lose steam over the forecast horizon, as growth in public wages and intermediate consumption decelerates.

Investment dynamics recorded in the first half of the year were significantly affected by strong fluctuations in the Irish multinational sector. When excluding Ireland, investment expanded only moderately. Altogether, growth in gross fixed capital formation is revised upwards substantially by 0.5 percentage points in 2025, reaching 2.0%. Investment is expected to pick up significantly in 2026 to a rate of 2.6%, mainly driven by increased investment in equipment spurred by the German fiscal impulse and greater deployment of RRF funds, alongside the relatively healthy financial position of the corporate sector (see Box I.3.1). Investment growth is set to slow down slightly to 2.1% in 2027. The expansion of construction investment is anticipated to take longer to materialise than previously expected.

Amid continued slowdown of employment growth, the EU economy generated jobs for an additional 380 000 people in the first half of 2025. Employment is set to continue expanding moderately by 0.5% in 2025 and 2026, before decelerating to 0.4% in 2027.

The unemployment rate is anticipated to edge down further from 5.9% in 2025 and 2026 to 5.8% in 2027. In the context of an overall still tight labour market, immigration from outside the EU is expected to continue playing an increasingly important role in meeting labour demand (see Special Issue 2). The expectation of slowing employment growth combined with accelerating economic activity reflects a boost in productivity growth over the forecast horizon. Meanwhile, wage growth in the EU is set to decelerate from 4.0% in 2025 to 3.3% in 2026 and 3.1% in 2027. The upturn in productivity, coupled with wage moderation, is projected to lead to a significant slowdown in unit labour costs over the next two years.

Headline inflation in the euro area is expected to hover around the ECB target of 2% throughout the forecast horizon. This overall stability conceals varying trends across inflation components. Inflation in services and food prices is set to weaken gradually as wage growth decelerates and pipeline pressures in food manufacturing ease. On the contrary, while energy inflation is expected to remain negative in 2025 and 2026, it is anticipated to firm gradually and turn positive in 2027, if the new EU Emissions Trading System (ETS2) enters into force, as currently legislated (see Special Issue 3). Inflation in non-energy industrial goods is set to remain low and stable throughout the forecast horizon, restrained by intensifying competitive pressures from imports and the appreciation of the euro. These trends are corroborated by near term forecasts based on selling price expectations from the Commission’s business surveys (see Box I.6.1). All in all, inflation in the euro area is expected to slow from 2.4% in 2024 to 2.1% in 2025 and then remain broadly stable at 1.9% in 2026 and 2.0% in 2027. In the EU, headline inflation is projected to fall marginally from 2.6% in 2024 to 2.5% in 2025 before declining to 2.1% in 2026 and reaching 2.2% in 2027. Mirroring easing pressures in services, core inflation (excluding energy and food) is set to decline gradually towards 2% by end-2027 in both the euro area and the EU.

The EU general government deficit is projected to increase from 3.1% of GDP in 2024 to 3.3% in 2025 and 2026 and 3.4% in 2027, on a no-policy change basis. Similarly, in the euro area the deficit is set to increase from 3.1% of GDP in 2024 to 3.2% in 2025, 3.3% in 2026 and 3.4% in 2027.

This increase is driven by rising defence spending in the EU (from 1.5% of GDP in 2024 to 2% in 2027 (measured according to the Classification of the Functions of Government), along with continued growth in interest expenditure and some revenue shortfalls. However, fiscal adjustment plans in several Member States are expected to partially offset these deficit-increasing factors. Twelve Member States are set to have deficits exceeding 3% of GDP in 2027, one more than in 2025. The fiscal stance is projected to remain broadly neutral over the forecast horizon in both the EU and euro area, although with considerable variation among Member States. The EU debt-to-GDP ratio is projected to increase from 82% in 2024 to 85% in 2027 (from 88% to 91% in the euro area), driven by persistent primary deficits and an average cost of servicing government debt that is higher than nominal GDP growth. By 2027, four Member States are set to have debt ratios above 100% of GDP. 

Persistently high trade policy uncertainty continues to burden economic activity, while the economic impact of the current tariffs and non-tariff restrictions and resulting supply chain disruptions might be greater than expected. These factors could be weighing more heavily on EU exports and productive efficiency. Meanwhile, geopolitical tensions remain high, as evidenced by Russia’s war of aggression against Ukraine, which has been weighing especially on the economic performance of neighbouring countries (see Special Issue 1), while the October Gaza peace plan offers a glimmer of hope for regional stability in the Middle East. Continuous shifts in trade policy could increase volatility in global financial markets. Re-pricing in equity markets, especially in the US technology sector, continued challenges to the independence of the US Federal Reserve, and concerns about US fiscal sustainability in the medium to long term might impact investors’ confidence and global financing conditions. The recent appreciation of the euro could weigh on external competitiveness more than currently expected. The increasing frequency of climate-related disasters could undermine resilience and growth as the costs of such events are likely to rise further. On the upside, resolute progress on reforms and the competitiveness agenda, higher defence spending focused on EU production, and new trade agreements with third countries could bolster economic activity more than projected. Meanwhile, risks to the inflation outlook are broadly balanced.  

GDP growth map

Document

Database

European Economic Forecast – Statistical annex database