S&P Global has revised its 2026 inflation forecast upward by an average of 0.7 ppt and lowered its 2026 growth forecast by 0.3 pp across Europe.
It expects only one additional rate hike from the ECB and no more than one rate hike from the Bank of England in Q3 2026.
It estimates 2026 GDP growth would deviate from its baseline by about 0.25 pp in a milder scenario and minus 0.5 pp in a severe scenario.
By contrast, its 2026 UK growth forecast is left almost unchanged. This is mainly due to a strong first quarter and substantial revisions to 2025 GDP data that improved carry-over effects.
From a net-trade perspective, the revision is marginally positive, as weaker domestic demand curbs imports. This more than offsets the decline in exports that results from the dampening effects of higher energy prices and bond yields on external demand.
S&P Global still expects another European Central Bank (ECB) rate hike in September this year, following the first one in June. This is consistent with the latest ECB staff macro projections, which still envisage growth above potential and core inflation above target over the medium term.
The Swiss National Bank will probably not increase rates before next year, it noted.
By contrast, it no longer forecasts two but at most one Bank of England (BoE) rate hike this year, most likely in September. It expects monetary tightening in the United Kingdom will be less pronounced than in the eurozone and less material than markets have priced in.
This is because of the more fragile UK labour market, a likely deceleration in wage growth, and increasing lending rates due to pre-emptively tightened financing conditions.
Additionally, the BoE bank rate is already in restrictive territory, whereas the ECB’s policy rate was still below neutral prior to the increase in June.
Despite relatively low net trade, most economies continued to expand at the start of the year on the back of robust domestic consumption.
The outlook for the remainder of the year is less favorable, as the energy price shock continues to affect economies in our baseline assumptions. S&P Global expects a quarter-on-quarter (QoQ) contraction across European economies in Q2 2026 and forecasts subdued growth till the year end. This near-term outlook reflects stagflationary conditions.
European households are absorbing a large share of the energy price shock. Even so, policy support is set to be limited, as fiscal buffers are smaller than during the inflation shock in 2022.
GDP growth is uneven. S&P Global expects 2026 GDP growth to be lowest in Germany, France and Italy. By contrast, Spain should remain among the stronger performers, even though GDP growth will likely decelerate compared with 2025.
Notably, Germany would have entered a recession by the end of 2026 if fiscal support—particularly for rail infrastructure and defence—hadn’t mitigated the energy price shock.
Another spike in oil prices and tightening financial conditions would push European economies into recessions by the end of 2026. Risks to the downside still exist, mainly due to the time it could take for oil and gas flows to recover.
Under a severe scenario, they do not recover materially before 2027, leading to another spike in energy prices. Specifically, spot oil prices would peak in Q3 2026 at about 10 per cent above the peak in April.
Under this scenario, S&P Global expects eurozone inflation would exceed our current base case by about 0.7 pp in 2026, while GDP growth would be 0.5 pp and 0.4 pp below its baseline in 2026 and 2027 respectively.
This would push large economies like Germany, France, and Italy into recessions by the end of 2026. Spain and the United Kingdom would enter at least a technical recession in Q3 2026 under this severe scenario.
In a milder scenario, a rapid and sustained decline in oil prices would lift GDP by 0.25 pp in 2026 and prevent central banks hiking rates later this year. If a reopening of the Strait of Hormuz leads to a faster recovery in oil and gas flows than assumed in the baseline, market expectations for central banks’ policy responses and confidence could improve significantly, contributing to equity markets resuming their upward trend.
Under this more benign upside scenario, S&P Global would likely revise its European GDP growth forecasts upward by an average of about 0.25 pp for 2026 and 0.3 pp for 2027.
It would revise its inflation forecasts downward by 0.5 pp for 2026 and 0.1 ppt for 2027 in this scenario. It does not expect any rate hikes by the BoE and potentially no rate hikes by the ECB in September this year.
Fibre2Fashion News Desk (DS)
